Working Papers
Information Traps in Over-the-counter Markets (new draft coming soon)
Presented at: WFA, SFS Cavalcade, FTG European Summer Meeting, FTG Summer School, Wharton, UPenn(econ), INSEAD, Penn State (econ), Federal Reserve Bank of Philadelphia, McGill, Tsinghua University (PBCSF), Peking University (HSBC), SJTU (Antai).
Presented at: WFA, SFS Cavalcade, FTG European Summer Meeting, FTG Summer School, Wharton, UPenn(econ), INSEAD, Penn State (econ), Federal Reserve Bank of Philadelphia, McGill, Tsinghua University (PBCSF), Peking University (HSBC), SJTU (Antai).
Abstract: I analyze the interaction between buyers’ information acquisition and market liquidity in over-the-counter markets with adverse selection. If a buyer anticipates that future buyers will acquire information about asset quality, she has an incentive to acquire information to avoid buying a lemon that will be hard to sell later. However, when current buyers acquire information, they cream-skim the market, leaving a larger fraction of lemons for sale and giving future buyers an incentive to acquire information. A liquid market can go through a self-fulfilling market freeze when buyers start to acquire information. More importantly, if information acquisition continues for a long enough period of time, the market gets stuck in an information trap with low liquidity: information acquisition worsens the composition of assets remaining on the market, and the bad composition incentivizes information acquisition. This prediction helps explain why the market for non-agency residential mortgage-backed securities experienced a sudden drop in liquidity—as potential buyers realized the need for greater due diligence—but has remained essentially dormant despite a strong recovery in the housing market.
| InfoTrapOTC |
Intervention with Screening in Global Games (with Lin Shen)
Presented at: WFA, FIRS, FTG Summer School, Lisbon Meetings in Game Theory and Applications, Tsinghua Theory and Finance Workshop, INSEAD
Presented at: WFA, FIRS, FTG Summer School, Lisbon Meetings in Game Theory and Applications, Tsinghua Theory and Finance Workshop, INSEAD
Abstract: We analyze a canonical binary-action coordination game under the global games framework. To reduce coordination failure, we propose a novel intervention program that screens agents based on their heterogeneous beliefs of the coordination results. Compared with conventional government-guarantee type of programs, it incurs lower cost of implementation and suffers less from moral hazard problems. In equilibrium, only a small mass of "pivotal agents" receiving medium signals self-select to participate in the program. However, the effect is amplified by higher-order beliefs, and coordination failures can be significantly reduced. With negligible information frictions, the proposed program achieves the first-best outcome at zero expected cost. The proposed program can be applied to reduce coordination failures in a wide range of economic contexts.
| InterventionGlobalGames |
