Seminar

Information Aggregation in Dynamic Markets with Adverse Selection

Vladimir Asriyan (CREI, Barcelona)

January 19, 2018, 14:00–15:30

Toulouse

Room MS001

Job Market Seminar

Abstract

We study a dynamic market for durable assets, in which asset owners are privately informed about the quality of their assets and experience occasional productivity shocks that generate gains from trade. An important feature of our environment is that buyers worry not only about asset quality, but also about the prices at which they can re-sell the assets in the future. We show that this interaction between adverse selection and re-sale concerns generates an inter-temporal coordination problem and gives rise to multiple selfful filling equilibria. We construct sentiment equilibria, in which sunspots generate large fluctuations in asset prices, market liquidity, output and welfare. Furthermore, we show that the strategic nature of trade in our setting disciplines the set of possible sentiments as a function of the parameters of the model. The theory has implications for empirical work in asset pricing and macroeconomics.

See also