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Waiting for News in the Market for Lemons
Author(s) -
Daley Brendan,
Green Brett
Publication year - 2012
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta9278
Subject(s) - adverse selection , economics , asset (computer security) , reservation , microeconomics , quality (philosophy) , value (mathematics) , welfare , pessimism , construct (python library) , business , computer science , market economy , computer network , philosophy , computer security , epistemology , machine learning , programming language
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.