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Title:Adverse selection and liquidity distortion in decentralized markets PDF Logo
Authors:Chang, Briana
Issue Date:2010
Series/Report no.:Discussion Paper, Center for Mathematical Studies in Economics and Management Science 1513
Abstract:Why do some markets remain illiquid even when there is a positive gain from trade? In order to understand the real determinants of market liquidity in decentralized markets, we are going to analyze this question in a competitive market setting when both search frictions and adverse selection play roles. In a dynamic environment with heterogenous sellers and buyers, we investigate the role of market frictions and how adverse selection leads to the distortion of equilibrium market liquidity. The resulting friction therefore prohibits resources from reallocating efficiently. In the application of capital reallocation, we further show that this trading friction can generate significant economic fluctuations.
Subjects:Liquidity
Search frictions
Adverse selection
Uncertainty
Capital Reallocation
JEL:D82
G1
Document Type:Working Paper
Appears in Collections:Discussion Papers, Kellogg School of Management, Northwestern University

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