We are grateful to a co-editor and three anonymous referees for helpful comments and suggestions. We are greatly indebted to Jeremy Bulow, Michael Harrison, and Andrzej Skrzypacz for useful conversations, comments, and encouragement. Special thanks also to Peter DeMarzo, Johannes Hörner, Ilan Kremer, Jon Levin, Paul Milgrom, Yuliy Sannikov, Bob Wilson, and seminar participants at Chicago, Chicago GSB, Duke, MIT, Kellogg, NYU, Penn, Stanford, Olin, Wharton, UNC, Yale, and the 7th Annual Duke/Northwestern/Texas IO Theory Conference.
Waiting for News in the Market for Lemons
Article first published online: 25 JUL 2012
© 2012 The Econometric Society
Volume 80, Issue 4, pages 1433–1504, July 2012
How to Cite
Daley, B. and Green, B. (2012), Waiting for News in the Market for Lemons. Econometrica, 80: 1433–1504. doi: 10.3982/ECTA9278
- Issue published online: 25 JUL 2012
- Article first published online: 25 JUL 2012
- Manuscript received May, 2010; final revision received October, 2011.
- Dynamic games;
- adverse selection;
- information economics;
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.