JUNYUAN ZOU
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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).
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
File Size: 1463 kb
File Type: pdf
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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
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
File Size: 530 kb
File Type: pdf
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