Trading dynamics in decentralized markets with adverse selection

• 成果类型: Article
• 署名作者: Camargo, Braz; Lester, Benjamin
• 署名单位: Getulio Vargas Foundation; Federal Reserve System - USA; Federal Reserve Bank - Philadelphia
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2014.07.013
• 发表日期: 2014
• 页码: 534-568
• 关键词: Adverse selection; decentralized trade; liquidity; Market freeze and recovery

摘要

We study a dynamic, decentralized lemons market with one-time entry and characterize its set of equilibria. Our framework offers a theory of how frozen markets suffering from adverse selection recover or thaw over time endogenously; given an initial fraction of lemons, our model delivers sharp predictions about the length of time it takes for the market to recover, and how prices and the composition of assets in the market behave over this horizon. We use our framework to analyze a form of government intervention introduced during the recent financial crisis in order to help unfreeze the market for asset-backed securities. We find that, depending on the fraction of lemons in the market, such an intervention can speed up or slow down market recovery. More generally, our analysis highlights that the success of an intervention in a lemons market depends on both its size and duration. Published by Elsevier Inc.