Information Aggregation in Dynamic Markets with Adverse Selection


How effectively does a decentralized marketplace aggregate information that is dispersed throughout the economy? We study this question in a dynamic setting, in which sellers have private information that is correlated with an unobservable aggregate state. We first characterize equilibria with an arbitrary finite number of informed traders. A common feature is that each seller’s trading behavior provides an informative and conditionally independent signal about the aggregate state. We then ask whether the state is revealed as the number of informed traders goes to infinity. Perhaps surprisingly, the answer is no. We provide generic conditions under which the amount of information revealed is necessarily bounded and does not reveal the aggregate state. When these conditions are violated, there may be coexistence of equilibria that lead to aggregation with those that do not. We discuss the implications for policies meant to enhance information dissemination in markets. Reporting lags combined with segmented trading platforms can be an effective way to ensure information aggregation without sacrificing welfare. In general, a partially revealing information policy can increase trading surplus.