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research article

Information percolation in segmented markets

Duffie, Darrell
•
Malamud, Semyon  
•
Manso, Gustavo
2014
Journal Of Economic Theory

We study equilibria of dynamic over-the-counter markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors differ with respect to information quality, including initial information precision, and also in terms of market "connectivity," the expected frequency of their bilateral trading opportunities. We characterize endogenous information acquisition and show how learning externalities affect information gathering incentives. More "liquid" markets lead to higher equilibrium information acquisition when the gains from trade and market duration are sufficiently large. On the other hand, for a small market duration, the opposite may occur if agents vary sufficiently in terms of their market connectivity. (C) 2014 Published by Elsevier Inc.

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