Trading dynamics in decentralized markets with adverse selection

Resumo

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.

Ficha do documento

Tipo

Artigo científico

Ano

2014

Instituição

Academic Press Inc Elsevier Science

Fonte

Repositório da FGV

Idioma

Inglês

Acesso

Acesso restrito

DOI

10.1016/j.jet.2014.07.013

Identificador

oai:repositorio.fgv.br:10438/23415

Temas

Economia

Palavras-chave

Adverse selectionDecentralized tradeLiquidityMarket freeze and recoveryEconomiaComércio