Information Percolation in Segmented Markets
We calculate equilibria of dynamic double-auction markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors are segmented into groups that differ with respect to characteristics determining information quality, including initial information precision as well as market "connectivity," the expected frequency of their trading opportunities. Investors with superior information sources attain strictly higher expected profits, provided their counterparties are unable to observe the quality of those sources. If, however, the quality of bidders' information sources are commonly observable, then, under conditions, investors with superior information sources have strictly lower expected profits.
The research of S. Malamud was supported in part by NCCR FINRISK, Project A5. Duffie is at the Graduate School of Business, Stanford University and is an NBER Research Associate. Malamud is at Swiss Finance Institute at EPF Lausanne. Manso is at the Sloan School of Business, MIT. We are grateful for research assistance from Xiaowei Ding, Michelle Ton, and Sergey Lobanov, and for discussion with Daniel Andrei, Luciano I. de Castro, Julien Cujean, Eiiricho Kazumori, and Phil Reny. Malamud gratefully acknowledges financial support by the National Centre of Competence in Research "Financial Valuation and Risk Management" (NCCR FINRISK).The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
"Information Percolation in Segmented Markets" (with Semyon Malamud and Gustavo Manso), Graduate School of Business, Stanford University, forthcoming, Journal of Economic Theory, 2014, Technical Appendices (published online only). citation courtesy of