Working Paper: CEPR ID: DP17615
Authors: William Fuchs; Piero Gottardi; Humberto Moreira
Abstract: We consider a dynamic adverse selection model where privately informed sellers of divisible assets choose when and how much to sell to competing buyers. With commitment, delay and lower quantities signal higher quality. Only the discounted quantity traded is pinned down in equilibrium. With spot contracts and observablepast trades, there is a unique, fully separating path of trades in equilibrium. Regardless of the trade horizon or trade frequency, the same welfare is attained as in the commitment case. With continuous trading, delay alone signals higher quality. With privately observable trades the equilibrium coincides only when trading takes place continuously.
Keywords: Adverse Selection; Market Dynamics; Signaling Mechanisms
JEL Codes: D82; G32; D53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| seller type quality (L15) | quantity sold (C69) |
| delay (Y60) | signaling seller quality (L15) |
| trading frequency (G14) | signaling ability (D83) |
| observability of past trades (G14) | signaling ability (D83) |
| absence of commitment (J22) | inability to signal (D82) |