Dynamic markets for lemons : performance, liquidity, and policy intervention

Even though adverse selection pervades markets for real goods and financial assets, equilibrium in such markets is not well understood. What are the properties of equilibrium in dynamic markets for lemons? What determines the liquidity of a good? Which market structures perform better, decentralized ones, in which trade is bilateral and prices are negotiated, or centralized ones, in which trade is multilateral and agents are price‐takers? Is there a role for government intervention? We show that when the horizon is finite and frictions are small, decentralized markets are more liquid and perform better than centralized markets. Moreover, the surplus realized is above the static competitive surplus, and decreases as the horizon grows larger, approaching the static competitive surplus as the horizon becomes infinite even if frictions are non‐negligible. Subsidies on low quality or taxes on high quality raise surplus.We gratefully acknowledge financial support from Spanish Ministry of Science and Innovation, grants SEJ2007-67436 and ECO2011-29762. This paper builds on Moreno and Wooders (2001), http://econ.arizona.edu/docs/Working_Papers/Misc%20Years/quality_y2.pdf

Transparency and Distressed Sales under Asymmetric Information

We analyze price transparency in a dynamic market with private information and correlated values. Uninformed buyers compete inter- and intra-temporarily for a good sold by an informed seller suffering a liquidity shock. We contrast public versus private price offers. In a two-period case all equilibria with private offers have more trade than any equilibrium with public offers; under some additional conditions we show Pareto-dominance of the private-offers equilibria. If a failure to trade by the deadline results in an efficiency loss, public offers can induce a market breakdown before the deadline, while trade never stops with private offers

Bailout Stigma

We develop a model of bailout stigma where accepting a bailout signals a firm's balance-sheet weakness and worsens its funding prospect. To avoid stigma, a firm with high-quality legacy assets either withdraws from subsequent financing after receiving a bailout or refuses a bailout altogether to send a favorable signal. The former leads to a short-lived stimulation with subsequent market freeze even worse than if there were no bailout. The latter revives the funding market, albeit with delay, to the level achievable without any stigma. Strikingly, a bailout offer is most effective when many firms reject it (to build a favorable reputation) rather than accept it

Essays on Dynamic Games of Incomplete Information

This dissertation consists of three essays that study the dynamic games with incomplete information. In the first chapter, I study a dynamic trading game where a seller and potential buyers start out symmetrically uninformed about the quality of a good, but the seller becomes informed about the quality, so that the asymmetric information between the agents increases over time. The introduction of a widening information gap results in several new phenomena. In particular, the interaction between screening and learning generates nonmonotonic price and trading patterns, contrary to the standard models in which asymmetric information is initially given. If the seller\u27s effective learning speed is high, the equilibrium features collapse-and-recovery behavior: Both the equilibrium price and the probability of a trade drop at a threshold time and then increase later. The seller\u27s payoff is nonmonotonic in his learning speed, as a slower learning speed can lead to higher payoff for the seller. In the second chapter, I study a dynamic one-sided-offer bargaining model between a seller and a buyer under incomplete information. The seller knows the quality of his product while the buyer does not. During bargaining, the seller randomly receives an outside option, the value of which depends on the hidden quality. If the outside option is sufficiently important, there is an equilibrium in which the uninformed buyer fails to learn the quality and continues to make the same randomized offer throughout the bargaining process. As a result, the equilibrium behavior produces an outcome path that resembles the outcome of a bargaining deadlock and its resolution. The equilibrium with deadlock has inefficient outcomes such as a delay in reaching an agreement and a breakdown in negotiations. Bargaining inefficiencies do not vanish even with frequent offers, and they may exist when there is no static adverse selection problem. In the third chapter, I address the following question: when does an incumbent party have an incentive to experiment with a risky reform policy in the presence of future elections? I study a continuous-time game between two political parties with heterogeneous preferences and a median voter. I show that while infrequent elections are surely bad for the median voter, too frequent elections can also make him strictly worse off. When the election frequency is low, a standard agency problem arises and the incumbent party experiments with its preferred reform policy even if its outlook is not promising. On the other hand, when the election frequency is too high, in equilibrium the incumbent stops experimentation too early because the imminent election increases the incumbent\u27s potential loss of power if it undertakes risky reform. The degree of inefficiency is large enough that too frequent elections are worse for the median voter than a dictatorship

Information about sellers' past behavior in the market for lemons

This paper studies the role of time-on-the-market information in dynamic trading environments under adverse selection. I consider a sequential search model in which (informed) sellers receive price offers from (uninformed) buyers and analyze both the case in which buyers receive no information about sellers' trading histories and the case in which buyers observe sellers' time-on-the-market. I analyze how the observability of time-on-the-market influences agents' trading behavior and investigate its welfare implications in both the single-seller environment and the stationary market environment

Essays in search theory

This thesis consists of three papers on search theory. Chapter 2 studies stationary cutoff-strategy equilibria of a dynamic market model where buyers sample sellers sequentially from an unknown distribution. Buyers learn about the distribution from the sampled sellers and a private "trade signal". The trade signal reveals whether a randomly chosen seller traded yesterday. The signal's precision and the market distribution of options are determined in equilibrium. Observing a trade (as opposed to no trade) is good news about the distribution. Buyers who observe a trade use a higher cutoff than buyers who observe no trade, despite buyers' learning from sampled sellers that puts a countervailing pressure on the cutoffs. The trade signal may reduce market effciency, while an appropriate exogenous signal increases effciency. Chapter 3 extends the standard sequential search model by allowing the agent who inspects items sequentially (the "searcher") to differ from the agent who chooses from the set of inspected items (the "chooser"). I show for a general joint distribution of the agents' preferences that the searcher's optimal policy is a cutoff rule. The cutoff is weakly decreasing in time, i.e., exhibits the "discouragement effect". I characterise the cutoff and discuss some testable implications of the discouragement effect. Chapter 4 relaxes the standard sequential search model's assumption that the searching agent makes no choice mistakes. In my model, once the agent stops the search process, she chooses the best inspected item with probability 1-ε and uniformly among the remaining inspected items with probability ε. I show that her optimal policy is a stochastic cutoff rule and that she may both experience regret and search longer than an agent who makes no mistakes