Working Paper: NBER ID: w17295
Authors: Darrell Duffie; Semyon Malamud; Gustavo Manso
Abstract: 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.
Keywords: Information Percolation; Segmented Markets; Dynamic Double-Auction Markets
JEL Codes: D53; D83; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| superior information sources (D83) | higher expected profits (L21) |
| information observability (D83) | lower expected profits (D22) |
| connectivity (D85) | higher expected profits (L21) |
| initial information quality (L15) | expected profits (D33) |
| market structure (D49) | expected gains from trade (F11) |