ADVERSE SELECTION WITH HETEROGENEOUSLY INFORMED AGENTS

A model of over-the-counter markets is proposed. Some asset buyers are informed in that they can identify high-quality assets. Sellers with private information choose what type of buyers they want to trade with. When the measure of informed buyers is low, a unique equilibrium exists, and interestingly, price, trading volume and welfare typically decrease with more informed buyers. When the measure of informed buyers is intermediate, multiple equilibria arise. A switch from one equilibrium to another can lead to large drops in liquidity, price, trading volume, and welfare, like a financial crisis. Implications of an endogenous measure of informed buyers are also studied.     

Trading mechanism selection with directed search when buyers are risk averse

We endogenize the trading mechanism selection in a model of directed search with risk averse buyers and show that the unique symmetric equilibrium entails all sellers using fixed price trading. Mechanisms that prescribe the sale price as a function of the realized demand (auctions, bargaining, discount pricing, etc.) expose buyers to the “price risk”, the uncertainty of not knowing how much to pay in advance. Fixed price trading eliminates the price risk, which is why risk averse customers accept paying more to shop at such stores.     

Evolutionary stability of bargaining and price posting: implications for formal and informal activities

In this paper we study the co-existence of two well known trading protocols, bargaining and price-posting. To do so we consider a frictional environment where buyers and sellers play price-posting and bargaining games infinitely many times. Sellers switch from one market to the other at a rate that is proportional to their payoff differentials. Given the different informational requirements associated with these two trading mechanisms, we examine their possible co-existence in the context of informal and formal markets. Other than having different trading protocols, we also consider other distinguishing features. We find a unique stable equilibrium where price-posting (formal markets) and bargaining (informal markets) co-exist. In a richer environment where both sellers and buyers can move across markets, we show that there exists a unique stable dynamic equilibrium where formal and informal activities also co-exist whenever sellers’ and buyers’ net costs of trading in the formal market have opposite signs.     

MEETINGS AND MECHANISMS

This article shows how meeting frictions affect equilibrium trading mechanisms and allocations in an environment where identical sellers post mechanisms to compete for buyers with ex ante heterogeneous private valuations. Multiple submarkets can emerge, each consisting of all sellers posting a particular mechanism and the buyers who visit those sellers. Under mild conditions, high-valuation buyers are all located in the same submarket, and low valuation buyers can be in: (i) the same submarket, (ii) a different submarket, and (iii) a mixture of (i) and (ii). The decentralized equilibrium is efficient when sellers can post auctions with reserve prices or entry fees.     

Competitive-search equilibrium in monetary economies

Competitive search was recently introduced in monetary economics by Rocheteau and Wright [Money in search equilibrium, in competitive equilibrium, and in competitive search equilibrium, Econometrica 73 (2005) 175-203]. We extend their work by eliminating the restriction that the fees market makers charge to enter a submarket must be either non-negative or identical for buyers and sellers. Without this restriction, buyers pay a positive fee to enter the submarket they visit and nothing else when they meet a seller. Sellers are remunerated by the market makers from the entry fees collected from the buyers. This trading arrangement allows buyers to perfectly predict their expenses, so the opportunity cost of holding idle money balances is eliminated.     

Seller competition by mechanism design

This paper analyzes a market game in which sellers offer trading mechanisms to buyers and buyers decide which seller to go to depending on the trading mechanisms offered. In a (subgame perfect) equilibrium of this market, sellers hold auctions with an efficient reserve price but charge an entry fee. The entry fee depends on the number of buyers and sellers, the distribution of buyer valuations, and the buyer cost of entering the market. As the size of the market increases, the entry fee decreases and converges to zero in the limit. We study how the surplus of buyers and sellers depends on the number of agents on each side of the market in this decentralized trading environment.     

Prices, Delay, and the Dynamics of Trade

We characterize the dynamics of trading patterns and market composition when trade is bilateral, finding a trading partner is costly, prices are determined by bargaining, and preferences are private information. We show that equilibrium is inefficient and exhibits delay as sellers price discriminate between buyers with different values. As frictions vanish, transaction prices are asymptotically competitive and the welfare loss of inefficient trading approaches zero, even though the trading patterns continue to be inefficient and delay persists. Journal of Economic Literature Classification Numbers: D40, D50.     

Search and endogenous concentration of liquidity in asset markets

We develop a search-based model of asset trading, in which investors of different horizons can invest in two assets with identical payoffs. The asset markets are partially segmented: buyers can search for only one asset, but can decide which one. We show the existence of a “clientele’’ equilibrium where all short-horizon investors search for the same asset. This asset has more buyers and sellers, lower search times, and trades at a higher price relative to its identical-payoff counterpart. The clientele equilibrium dominates the one where all investor types split equally across assets, implying that the concentration of liquidity is socially desirable.     

CONTINGENT PRICES AND MONEY*

Price posting with directed search is a widely used trading mechanism. Coles and Eeckhout showed that if sellers are allowed to post prices contingent on realized demand instead of one price, then there is real market indeterminacy. In this article, we fit this contingent price‐posting protocol into a monetary economy. We show that, as long as holding money is costly, there exists a unique equilibrium rather than a continuum. In this equilibrium sellers post a low price for when the buyer is alone, a high price for when several buyers show up, and buyers randomize between sellers and money holdings.     

Does money impede convergence?

Inspired by Clower’s conjecture that the necessity of trading through money in monetised economies might hinder convergence to competitive equilibrium, and hence, for example, cause unemployment, we experimentally investigate behaviour in markets where trading has to be done through money. In order to evaluate the properties of these markets, we compare their behaviour to behaviour in markets without money, where money cannot intervene. As the trading mechanism might be a compounding factor, we investigate two kinds of market mechanism: the double auction, where bids, asks and trades take place in continuous time throughout a trading period; and the clearing house, where bids and asks are placed once in a trading period, and which are then cleared by an aggregating device. We thus have four treatments, the pairwise combinations of non-monetised/monetised trading with double auction/clearing house. We find that: convergence is faster under non-monetised trading, implying that the necessity of using money to facilitate trade hinders convergence; that monetised trading is noisier than non-monetised trading; and that the volume of trade and realised surpluses are higher with the double auction than the clearing house. As far as efficiency is concerned, monetised trading lowers both informational and allocational efficiency, and while the double auction outperforms the clearing house in terms of allocational efficiency, the clearing house is marginally better than the double auction in terms of informational efficiency when trade is through money. Crucially we confirm the conjecture that inspired these experiments: that the necessity to use money in trading hinders convergence to competitive equilibrium, lowers realised trades and surpluses, and hence may cause unemployment.     

Randomized double auctions: gains from trade,trader roles,and price discovery

Experimental double-auction commodity markets are known to exhibit robust convergence to competitive equilibria under stable or cyclical supply and demand conditions, but little is known about their performance in truly random environments. We provide a comprehensive study of double auctions in a stochastic setting where the equilibrium prices, trading volumes and gains from trade are highly variable across periods, and with commodity traders who may buy or sell their goods depending on market conditions and their individual outcomes. We find that performance in this stochastic environment is sensitive to underlying market conditions. Efficiency is higher and convergence to the competitive equilibrium stronger when the potential gains from trade are high and when the equilibrium spans a wide range of quantities, implying a large number of marginal trades. Speculative re-trading is prevalent, especially among those who have little to gain under equilibrium pricing. Those with the largest expected gains typically earn far less than predicted, while those with little or no predicted earnings gain modestly from speculation, leading to some redistribution of gains from high to low expected earners. Excessive trading volumes are associated with negative efficiencies in markets with low gains from trade, but not in the high-gains markets, where zero-sum trading and re-trading appear to enforce efficiency and near-equilibrium pricing. Buyers earn more relative to their competitive equilibrium benchmark than sellers do. Introducing trader specialization leads to fewer trading errors and higher market efficiency, but it does not eliminate zero-sum trading and re-trading.

     

Sorting versus screening: Search frictions and competing mechanisms

In a market where sellers compete by posting trading mechanisms, we allow for a general search technology and show that its features crucially affect the equilibrium mechanism. Price posting prevails when meetings are rival, i.e., when a meeting by one buyer reduces another buyer's meeting probability. Under price posting buyers reveal their type by sorting ex-ante. Only if the meeting technology is sufficiently non-rival, price posting is not an equilibrium. Multiple buyer types then visit the same sellers who screen ex-post through auctions.     

No trade

We investigate a common value bilateral bargaining model with two-sided private information and no aggregate uncertainty. A seller owns an asset whose common valuation is a deterministic function of the two traders' private signals. We first establish a no-trade theorem for this environment, and proceed to study the effect of the asset valuation structure and the trading mechanism on extent to which asymmetric information induces individuals to engage in mutually unprofitable exchange. A laboratory experiment is conducted, where trade is found to occur between 19% and 35% of the time, and this depends in systematic ways on both the asset valuation function and the trading mechanism. Both buyers and sellers adapt their strategy to changes in the asset valuation function and to changes in the trading mechanism in clearly identifiable ways. An equilibrium model with naïve belief formation accounts for some of the behavioral findings, but open questions remain.     

Bargaining and separation costs in two-sided markets

A two-sided market is characterized by contract negotiations, bilateral exchanges between buyers and sellers. Separation costs endow trading partners with monopoly power, rendering this a market of bilateral monopolistic competition. Market equilibrium is defined by these negotiations, a matching of the two sides, and a set of prices; the costs of disagreement are endogenous. A bargaining strategy some players use is commitment to a position. Disagreements are possible and, contrary to the case of bilateral monopoly, these disagreements are not always inefficient.     

Quality uncertainty and time inconsistency in a durable good market

In a durable good monopoly where consumers cannot observe quality prior to purchase and product improvement occurs exogenously over time, I show that uncertainty in quality may resolve the time inconsistency problem (even for low levels of product improvement). Higher dispersion in quality creates greater demand for future product by increasing the incentive of buyers with inferior quality realizations to repeat purchase and this, in turn, reduces the incentive of the seller to cut future price. For various levels of product improvement, I characterize the range of quality uncertainty for which the market equilibrium is identical to one where the monopolist can credibly precommit to future prices. I also show that the presence of quality uncertainty can lead to no trading in the primary good market. Further, in contrast to the literature on the Coase conjecture, inability to precommit to future prices can reduce social welfare as a result of the market closure.     

Competitive search markets for durable goods

Summary. This paper considers a dynamic version of Akerlof's (1970) lemons problem where buyers and sellers must engage in search to find a trading partner. We show that if goods are durable, the market itself may provide a natural sorting mechanism. In equilibrium, high-quality goods sell at a higher price than low-quality goods but also circulate longer. This accords with the common wisdom that sellers who want to sell fast may have to accept a lower price. We then compare the equilibrium outcomes under private information with those under complete information. Surprisingly, we find that for a large range of parameter values the quilibrium outcomes under the two information regimes coincide, despite the fact that circulation time is used to achieve separation. Received: August 24, 2000; revised version: October 24, 2000     

Auction and the informed seller problem

A seller possessing private information about the quality of a good attempts to sell it through a second-price auction with announced reserve price. The choice of a reserve price transmits information to the buyers. We characterize the equilibria with monotone beliefs of the resulting signaling game and show that they lead to a reduced probability of selling the good compared to the symmetric information situation. We compare the unique separating equilibrium of this signaling game to the equilibrium of a screening game in which an uninformed monopoly broker chooses the trading mechanism. We show that the ex ante expected probability of trade may be larger with a monopoly broker, as well as the ex ante total expected surplus.     

AN EMPIRICAL STATIONARY EQUILIBRIUM SEARCH MODEL OF THE HOUSING MARKET*

This article specifies and estimates a computationally tractable stationary equilibrium model of the housing market. The model is rich and incorporates many of its unique features: buyers’ and sellers’ simultaneous search behavior, heterogeneity in their motivation to trade, transaction costs, a trading mechanism with posting prices and bargaining, and the availability of an exogenous advertising technology that induces endogenous matching. Estimation uses Maximum Likelihood methods and Multiple Listing Services data. The estimated model is used to simulate housing market outcomes when (a) the amount of information displayed on housing listings increases and (b) real estate agent’s commission rates change.     

Comparative statics in a simple class of strategic market games

This paper investigates the effects of entry in two-sided markets where buyers and sellers act strategically. Applying new tools from supermodular optimization/games, sufficient conditions for different comparative statics results are obtained. While normality of one good is sufficient for the equilibrium price to be increasing in the number of buyers, normality of both goods is required for equilibrium bids and sellers' equilibrium utilities to be increasing in the number of buyers. When the economy is replicated, normality of both goods and gross substitutes guarantee that the equilibrium of the strategic market game converges monotonically (in quantities) to the competitive equilibrium. Simple counter-examples are provided to settle other potential conjectures of interest.     

基于买方市场的劳工标准移植研究

市场的竞争促使越来越多发展中国家的企业成为劳工认证供应链的一部分。本文基于买方主导型市场结构,运用信息租模型分析劳工标准在中国移植状况。研究表明,高劳工标准的存在,是供应商追求信息租金和采购商追求真实剩余博弈的均衡;当供应商类型分布不满足单调风险率性质时,会出现低标准混同均衡,也是采购商借助买方市场势力极大化真实剩余的结果;当采购商风险偏好属于规避型时,最后均衡劳工标准较之风险中性时要高,同时买卖双方福利都会提高。