Waiting for News in the Market for Lemons
We study a dynamic setting in which stochastic information (news) about the value of a privately informed seller's asset is gradually revealed to a market of buyers. We construct an equilibrium that involves periods of no trade or market failure. The no-trade period ends in one of two ways: either enough good news arrives, restoring confidence and markets reopen, or bad news arrives, making buyers more pessimistic and forcing capitulation that is, a partial sell-off of low-value assets. Conditions under which the equilibrium is unique are provided. We analyze welfare and efficiency as they depend on the quality of the news. Higher quality news can lead to more inefficient outcomes. Our model encompasses settings with or without a standard static adverse selection problem-in a dynamic setting with sufficiently informative news, reservation values arise endogenously from the option to sell in the future and the two environments have the same equilibrium structure. © 2012 The Econometric Society.
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- Econometrics
- 3803 Economic theory
- 3802 Econometrics
- 3801 Applied economics
- 1403 Econometrics
- 1402 Applied Economics
- 1401 Economic Theory
Citation
Published In
DOI
EISSN
ISSN
Publication Date
Volume
Issue
Start / End Page
Related Subject Headings
- Econometrics
- 3803 Economic theory
- 3802 Econometrics
- 3801 Applied economics
- 1403 Econometrics
- 1402 Applied Economics
- 1401 Economic Theory