Working Paper: CEPR ID: DP16884
Authors: Eeva Mauring; Piotr Denderski
Abstract: In the presence of trading frictions and imperfect information about market conditions, the quality of the available information matters for optimal prices. Prices, in turn, matter for the likelihood of trading. We model this interdependency in a competitive search equilibrium with aggregate risk and study the social value of better public information. While perfect information is always optimal, marginal effects of information can be positive, negative or neutral for trade. Equilibria featuring inefficient price dispersion can arise if some sellers choose a price that implies not selling the good when the demand is low. The salient features of the matching function matter for how information affects the equilibrium. We also find that entry is in general inefficient.
Keywords: competitive search; public information; aggregate risk; uncertainty shocks; transparency; price dispersion
JEL Codes: C78; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased precision of public information (D89) | Changes in expected value of trade (F11) |
| Increased precision of public information (D89) | Changes in pricing strategies adopted by sellers (D49) |
| Quality of available information (L15) | Optimal pricing (D40) |
| Optimal pricing (D40) | Likelihood of trade (F19) |
| Imperfect information (D83) | Inefficient price dispersion (D41) |
| Transition from PSE to MSE (P30) | Changes in signal precision (C22) |
| Changes in signal precision (C22) | Expected value of trade (D46) |
| Aggregate uncertainty (E10) | Reductions in welfare (I38) |
| Imperfect information (D83) | Inefficient entry into the market (L13) |