Working Paper: NBER ID: w20623
Authors: Veronica Guerrieri; Robert Shimer
Abstract: This paper explores price formation when sellers are privately informed about their preferences and the quality of their asset. There are many equilibria, including a semi- separating one in which each seller's price depends on a one-dimensional index of her preferences and asset quality. This multiplicity does not rely on off-the-equilibrium path beliefs and so is not amenable to standard signaling game refinements. The semi- separating equilibrium may be not Pareto efficient, even if it is not Pareto dominated by any other equilibrium. Instead, efficient allocations may require transfers across uninformed buyers, inconsistent with any equilibrium.
Keywords: Private Information; Market Mechanisms; Price Formation; Equilibrium; Pareto Efficiency
JEL Codes: D82; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sellers' private information regarding their preferences and asset quality (D82) | market outcomes (P42) |
| higher continuation values (J17) | higher prices (D49) |
| higher prices (D49) | lower sale probabilities (D44) |
| sellers' price-setting behavior (L11) | market outcomes (P42) |
| private information (D82) | buyers' perceptions and decisions (D80) |
| observationally identical assets (G19) | heterogeneous prices (P22) |
| high-quality assets (L15) | reduced trade (F19) |
| multiple equilibria (D50) | inefficient market outcomes (D61) |