A Dynamic Model of Equilibrium with Private Information (original) (raw)

Durables and Lemons: Private Information and the Market for Cars

SSRN Electronic Journal, 2019

We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and secondhand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.

A Large Market Game with Private Information on Both Sides

2011

Different notions of competitive equilibrium for economies with asymmetric information have been proposed in the literature. An important dividing line is the one between models in which individual trades can be monitored, so that quantity restrictions and non-linear prices can be part of an equilibrium arrangement, and models in which such monitoring is not possible. We contribute to the second strand in the literature by setting up a model of trade in large, anonymous markets in which both buyers and sellers may have private information. We prove the existence of equilibria and we compare our solution to other equilibrium notions by means of a simple example.

Dynamic Adverse Selection and the Size of the Informed Side of the Market

In this paper we examine the problem of dynamic adverse selection in a stylized market where the quality of goods is a seller’s private information. We show that in equilibrium all goods can be traded if a simple piece of information is made publicly available: the size of the informed side of the market. Moreover, we show that if exchanges can take place frequently enough, then agents roughly enjoy the entire potential surplus from exchanges. We illustrate these findings with a dynamic model of trade where buyers and sellers repeatedly interact over time. More precisely we prove that, if the size of the informed side of the market is a public information at each trading stage, then there exists a weak perfect Bayesian equilibrium where all goods are sold in finite time and where the price and quality of traded goods are increasing over time. Moreover, we show that as the time between exchanges becomes arbitrarily small, full trade still obtains in finite time – i.e., all goods are ...

Statistical mechanics of asset markets with private information

SSRN Electronic Journal, 2001

Traders in a market typically have widely different, private information on the return of an asset. The equilibrium price of the asset may reflect this information more accurately if the number of traders is large enough compared to the number of the states of the world that determine the return of the asset. We study the transition from markets where prices do not reflect the information accurately into markets where it does. In competitive markets, this transition takes place suddenly, at a critical value of the ratio between number of states and number of traders. The Nash equilibrium market behaves quite differently from a competitive market even in the limit of large economies.

Ignorance Promotes Competition: An Auction Model with Endogenous Private Valuations

The RAND Journal of Economics, 2004

We study a situation in which an auctioneer wishes to sell an object to one of N risk-neutral bidders with heterogeneous preferences. The auctioneer does not know bidders' preferences but has private information about the characteristics of the object, and must decide how much information to reveal prior to the auction. We show that the auctioneer has incentives to release less information than would be e±cient and that the amount of information released increases with the level of competition (as measured by the number of bidders). Furthermore, in a perfectly competitive market the auctioneer would provide the e±cient level of information.

The Value of Private Information in Monopoly

Journal of Industrial Economics, 2008

We investigate a basic question about a monopoly with incomplete information: when does the seller have an incentive to allow potential buyers to acquire more private information about their tastes for the seller's product? Under plausible conditions such as log-concave density of willingness-to-pay and convex marginal cost, the seller prefers that the paying customers be well informed as a group but be left in the dark regarding their individual tastes. 1 Another interpretation is that the seller controls the buyer's cost of acquiring information. It is assumed that the seller knows what information (i.e., the beliefs about one's taste for the seller's product) the buyer has after observing a signal. However, the realization of the signal is the private information of the buyer. To isolate the seller's incentive to supply information, we assume that the buyer has no control over her information, and any changes in the private information structure are known to the seller. Also, discuss the formal equivalence of two interpretations of the sources of buyer's uncertainty about the seller's product: the buyer can be unsure either about her taste for the product or about the product's 'objective quality.'

Private Strategies in Finitely Repeated Games with Imperfect Public Monitoring

The B.E. Journal of Theoretical Economics, 2002

We present three examples of finitely repeated games with public monitoring that have sequential equilibria in private strategies, i.e., strategies that depend on own past actions as well as public signals. Such private sequential equilibria can have features quite unlike those of the more familiar perfect public equilibria: (i) making a public signal less informative can create Pareto superior equilibrium outcomes; (ii) the equilibrium final-period action profile need not be a stage game equilibrium; and (iii) even if the stage game has a unique correlated (and hence Nash) equilibrium, the first-period action profile need not be a stage game equilibrium.

Technical Note—Nonlinear Pricing Competition with Private Capacity Information

Operations Research, 2016

We analyze the equilibrium of an incomplete information game consisting of two capacity-constrained suppliers and a single retailer. The capacity of each supplier is her private information. Conditioned on their capacities, the suppliers simultaneously and noncooperatively offer quantity-price schedules to the retailer. Then, the retailer decides on the quantities to purchase from each supplier to maximize his own utility. We prove the existence of a (pure strategy) Nash equilibrium for this game. We show that at the equilibrium each (infinitesimal) unit of the supply is assigned a marginal price that is independent of the capacities and depends only on the valuation function of the retailer and the distribution of the capacities. In addition, the supplier with the larger capacity sells all her supply.