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Working Paper
Trading dynamics in decentralized markets with adverse selection
The authors study a dynamic, decentralized lemons market with one-time entry and characterize its set of non-stationary equilibria. This framework offers a theory of how a market suffering from adverse selection recovers over time endogenously; given an initial fraction of lemons, the model provides sharp predictions about how prices and the composition of assets evolve over time. Comparing economies in which the initial fraction of lemons varies, the authors study the relationship between the severity of the lemons problem and market liquidity. They use this framework to understand how ...
Working Paper
INFORMATION SPILLOVERS, GAINS FROM TRADE, AND INTERVENTIONS IN FROZEN MARKETS
We study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants. We find a fundamental tension in maximizing welfare: While some intervention is required to restore trading, too much intervention depletes trade of its informational content. We characterize the optimal policy that balances these two considerations and explore how it depends on features of the environment. Our model can be used to study a program ...
Report
Learning-by-employing: the value of commitment under uncertainty
We analyze commitment to employment in an environment in which an infinitely lived firm faces a sequence of finitely lived workers who differ in their ability to produce output. The ability of a worker is initially unknown to both the worker and the firm, and a worker's effort affects the information on ability that is conveyed by performance. We characterize equilibria and show that they display commitment to employment only when effort has a persistent but delayed impact on output. In this case, by providing insurance against early termination, commitment encourages workers to exert effort, ...
Working Paper
Subsidizing price discovery
When markets freeze, not only are gains from trade left unrealized, but the process of information production through prices, or price discovery, is disrupted as well. Though this latter effect has received much less attention than the former, it constitutes an important source of inefficiency during times of crisis. We provide a formal model of price discovery and use it to study a government program designed explicitly to restore the process of information production in frozen markets. This program, which provided buyers with partial insurance against acquiring low-quality assets, reveals a ...