Welfare Consequences of Information Aggregation and Optimal Market Size

Kei Kawakami

Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper studies a risk-sharing model where traders face endowment shocks and information asymmetries. We show that a negative participation externality arises due to the endogenous information aggregation by prices, and it creates a counter force to a standard positive externality of risk-sharing. As a result, the optimal market size that maximizes gains from trade per trader is ?nite. The model indicates that a collection of small markets can be a constrained e¢ cient market structure. We also study a decentralized process of market formation, and show that multiple markets can survive because of the negative informational externality among traders.

Keywords: Asymmetric information; Imperfect competition; Information aggregation; Market fragmentation; Network externality puzzle. (search for similar items in EconPapers)
JEL-codes: D43 D82 G14 L13 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-01
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Related works:
Journal Article: Welfare Consequences of Information Aggregation and Optimal Market Size (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1189

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