Dynamic trading with developing adverse selection

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

We study a dynamic trading game in which the information asymmetry between the agents develops over time. A seller and potential buyers start out symmetrically uninformed about the quality of a good, but the seller becomes informed after the game begins. We show that this developing adverse selection gives rise to novel trading dynamics. In particular, if the seller's learning speed is high, the equilibrium features “collapse-and-recovery” behavior: Both the equilibrium price and the trade probability first drop and then increase over time. While the trade surplus monotonically decreases as the learning speed increases, the seller's surplus may change non-monotonically.

Original languageEnglish (US)
Pages (from-to)761-802
Number of pages42
JournalJournal of Economic Theory
Volume176
DOIs
StatePublished - Jul 1 2018

Keywords

  • Adverse selection
  • Dynamic games
  • Information economics
  • Learning

ASJC Scopus subject areas

  • Economics and Econometrics

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