Information Aggregation in Dynamic Markets with Adverse Selection (with William Fuchs and Brett Gre en)
Abstract:
How effectiv
ely does a decentralized marketplace aggregate information that is disperse
d throughout the economy? We study this question in a dynamic setting, in w
hich sellers have private information that is correlated with an unobservab
le aggregate state. We first characterize equilibria with an arbitrary (but
finite) number of informed sellers. A common feature is that each seller’s
trading behavior provides an informative and conditionally independent sig
nal about the aggregate state. We then ask whether the state is revealed as
the number of informed sellers goes to infinity. Perhaps surprisingly, the
answer is no. We provide conditions under which the amount of information
revealed is necessarily bounded and does not reveal the aggregate state. Wh
en these conditions are violated, there may be coexistence of equilibria th
at lead to full revelation with those that do not. Finally, the theory has
implications for policies meant to enhance information dissemination in mar
kets.