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Information Aggregation in Dynamic Markets with Adverse Selection

Vladimir Asriyan

No 988, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: How effectively does a decentralized marketplace aggregate information that is dis-persed throughout the economy? We study this question in a dynamic setting, in which sellers have private information that is correlated with an unobservable aggregate state. We first characterize equilibria with an arbitrary (but finite) number of informed sellers. A common feature is that each seller’s trading behavior provides an informative and con-ditionally independent signal about the aggregate state. We then ask whether the state is revealed as the number of informed sellers goes to infinity. Perhaps surprisingly, the answer is no. We provide conditions under which the amount of information revealed is necessarily bounded and does not reveal the aggregate state. When these conditions are violated, there may be coexistence of equilibria that lead to full revelation with those that do not. We discuss the implications for policies meant to enhance information dissemination in markets.

Date: 2017
New Economics Papers: this item is included in nep-des, nep-dge and nep-mic
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