When asset values are correlated and sellers are privately informed, a trade of one asset can be informative about the value of other assets, which can in turn influence the trading decision of others. These "information spillovers" can play an important role in determining the manner and the efficiency with which assets are reallocated.In this paper, we develop a stylized framework to understand the role of information spillovers. The model involves two sellers (for convenience, we refer to them as Ann and Bob), each with an indivisible asset that has a value which is either low or high. Each seller is privately informed about the value of their asset. There is common knowledge of gains from trade, but buyers face a lemons problem (Akerlof * Asriyan: CREI, Ramon Trias Fargas, 25-27, Merce Rodoreda Bldg.,
We develop a rational theory of liquidity sentiments in which the market outcome in any given period depends on agents’ expectations about market conditions in future periods. Our theory is based on the interaction between adverse selection and resale considerations giving rise to an intertemporal coordination problem that yields multiple self-fulfilling equilibria. We construct “sentiment” equilibria in which sunspots generate fluctuations in prices, volume, and welfare, all of which are positively correlated. The intertemporal nature of the coordination problem disciplines the set of possible sentiment dynamics. In particular, sentiments must be sufficiently persistent and transitions must be stochastic. We consider an extension with production in which asset quality is endogenously determined and provide conditions under which sentiments are a necessary feature of any equilibrium. A testable implication is that assets produced in good times are of lower average quality than those produced in bad times. (JEL D84, D82, E32, E44, G12)
We study the effect of information spillovers and transparency in a dynamic setting with adverse selection and correlated asset values. A trade (or lack thereof) by one seller can provide information about the quality of other assets in the market. In equilibrium, the information content of this trading behavior is endogenously determined. We show that this endogeneity of information leads to multiple equilibria when the correlation between asset values is sufficiently high. That is, if buyers expect "bad" assets to trade quickly, then a seller with a bad asset has reason to be concerned about negative information being revealed, which induces her to trade quickly. Conversely, if buyers do not expect bad assets to trade quickly, then the seller has less to be concerned about and is more willing to wait. We study the implications for policies that target market transparency.We show that total welfare is higher when markets are fully transparent than when the market is fully opaque. However, both welfare and trading activity can decrease in the degree of market transparency. * Affiliation: CREi, Universitat Pompeu Fabra, and Barcelona GSE.
What is the role of monetary policy in a bubbly world? To address this question, we study an economy in which financial frictions limit the supply of assets. The ensuing scarcity generates a demand for "unbacked" assets, i.e., assets that are backed only by the expectation of their future value. We consider two types of unbacked assets: bubbles, which are created by the private sector, and money, which is created by the central bank.Bubbles and money share many features, but they also differ in two crucial respects.First, while the rents from the creation of bubbles accrue to entrepreneurs and foster investment, the rents from money creation accrue to the central bank. Second, while bubbles are driven by market psychology, and can rise and fall according to the whims of the market, money is under the control of the central bank. We characterize the optimal monetary policy and show that, through its ability to supply assets, monetary policy plays a key role in the bubbly world. The model sheds light on the recent expansion of central bank liabilities in response to the bursting of bubbles.JEL classification: E32, E44, O40
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