Information Spillovers, Gains from Trade, and Interventions in Frozen Markets

Braz Camargo; Kyungmin Kim; Benjamin Lester

doi:10.1093/rfs/hhv129

Information Spillovers, Gains from Trade, and Interventions in Frozen Markets

Braz Camargo, Kyungmin Kim, Benjamin Lester

Research output: Contribution to journal › Article › peer-review

4 Scopus citations

Abstract

We study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants. We find a fundamental tension in maximizing welfare: while some intervention is required to restore trading, too much intervention depletes trade of its informational content. We characterize the optimal policy that balances these two considerations, and explore how it depends on features of the environment. Our model can be used to study a program introduced in 2009 to restore information production in the market for legacy assets.

Original language	English (US)
Pages (from-to)	1291-1329
Number of pages	39
Journal	Review of Financial Studies
Volume	29
Issue number	5
DOIs	https://doi.org/10.1093/rfs/hhv129
State	Published - May 1 2016
Externally published	Yes

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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AB - We study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants. We find a fundamental tension in maximizing welfare: while some intervention is required to restore trading, too much intervention depletes trade of its informational content. We characterize the optimal policy that balances these two considerations, and explore how it depends on features of the environment. Our model can be used to study a program introduced in 2009 to restore information production in the market for legacy assets.

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Information Spillovers, Gains from Trade, and Interventions in Frozen Markets

Abstract

ASJC Scopus subject areas

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