Signaling in OTC Markets: Benefits and Costs of Transparency

2018 ◽  
Vol 55 (1) ◽  
pp. 47-75 ◽  
Author(s):  
Kerry Back ◽  
Ruomeng Liu ◽  
Alberto Teguia
Keyword(s):  
Adverse Selection ◽  
Costly Signaling ◽  
Gains From Trade ◽  
Over The Counter ◽  
Theoretical Rationale ◽  
Ex Post ◽  
Asset Quality ◽  
Market Benefits ◽  
Benefits And Costs

We provide a theoretical rationale for dealer objections to ex post transparency in over-the-counter markets. Disclosure of the terms of a transaction conveys information possessed by the dealer about the asset quality and reduces the dealer’s rents when she disposes of the inventory in a second transaction. We show that costly signaling in a transparent market benefits investors through lower spreads and higher volume. Dealers may also gain from transparency despite lower spreads when potential gains from trade are small or adverse selection is high, because in those circumstances higher volume offsets smaller spreads for dealer profits.

The revelation principle and mechanism design

2020 ◽  
pp. 661-719
Author(s):  
David M. Kreps
Keyword(s):  
Mechanism Design ◽  
Adverse Selection ◽  
Optimal Contract ◽  
Gains From Trade ◽  
Revelation Principle ◽  
Ex Post ◽  
The Government ◽  
Role Of The Government

This chapter evaluates a more general attack on optimal contract and mechanism design stressing cases of adverse selection, which makes use of the revelation principle. One should be clear about the uses to which the revelation principle is put. It can be thought of as a statement about how actually to implement contracts. But it may be better to use it with greater circumspection as a tool of analysis for finding the limits of what outcomes can be implemented, without reference to how best to implement a particular outcome. In some contexts of direct revelation, there will be situations ex post where the party in the role of the government knows that it can obtain further gains from trade from one or more of the parties who participated. Meanwhile, in many applications of the revelation principle, the party in the role of mechanism designer must be able to commit credibly to no subsequent (re)negotiation once it learns the types of the parties with which it is dealing.

Legal Environment and Contractual Choice

2021 ◽  
Vol 0 (0) ◽  
Author(s):  
Ho Cheung Cheng
Keyword(s):  
Optimal Contract ◽  
Legal Environment ◽  
Gains From Trade ◽  
Legal Systems ◽  
Ex Post ◽  
Ex Ante ◽  
Contractual Choice

Abstract This paper considers contractual choice under imperfect legal systems, in particular, contracts with different timing of payment. Ex-ante payment contracts are risky for the buyer, because the seller may shirk. Ex-post payment contracts are risky for the seller, as the buyer may default. Optimal contract is solved for any given legal environment. Exchanges with lower gains from trade tend to adopt ex-post payment contracts. The seller is a better proposer than the buyer in terms of the efficiency of the proposed contract. Surprisingly, offering ex-ante payment contracts is not strictly better for the seller under any legal environment. Moreover, mixed payment contracts are also analyzed and shown to never be optimal.

scholarly journals Liquidity Sentiments

2019 ◽  
Vol 109 (11) ◽  
pp. 3813-3848 ◽  
Author(s):  
Vladimir Asriyan ◽  
William Fuchs ◽  
Brett Green
Keyword(s):  
Adverse Selection ◽  
Average Quality ◽  
Coordination Problem ◽  
Market Conditions ◽  
Rational Theory ◽  
Asset Quality

We develop a rational theory of liquidity sentiments in which the market outcome in any given period depends on agents’ expectations about market conditions in future periods. Our theory is based on the interaction between adverse selection and resale considerations giving rise to an intertemporal coordination problem that yields multiple self-fulfilling equilibria. We construct “sentiment” equilibria in which sunspots generate fluctuations in prices, volume, and welfare, all of which are positively correlated. The intertemporal nature of the coordination problem disciplines the set of possible sentiment dynamics. In particular, sentiments must be sufficiently persistent and transitions must be stochastic. We consider an extension with production in which asset quality is endogenously determined and provide conditions under which sentiments are a necessary feature of any equilibrium. A testable implication is that assets produced in good times are of lower average quality than those produced in bad times. (JEL D84, D82, E32, E44, G12)

scholarly journals An Ex-Post Assessment of RES-E Support in Greece by Investigating the Monetary Flows and the Causal Relationships in the Electricity Market

Energies ◽  
2020 ◽  
Vol 13 (17) ◽  
pp. 4575
Author(s):  
Vassilis Stavrakas ◽  
Nikos Kleanthis ◽  
Alexandros Flamos
Keyword(s):  
Electricity Market ◽  
Analytical Framework ◽  
Policy Measure ◽  
Holistic View ◽  
Policy Interventions ◽  
Efficiency Assessment ◽  
Ex Post ◽  
Wholesale Electricity Market ◽  
Benefits And Costs ◽  
Post Assessment

One way to perceive the electricity market is as a network of actors connected through transactions and monetary flows. By exploring the monetary flows in the electricity market, one adopts a holistic view which can provide insights on the interactions between different components of the benefits and costs, as well as on the possible conflicts or alliances between the involved actors of the system. The importance of such an analysis becomes even more evident when considering if the system’s state would change due to either the effectuation of a policy measure or a shift in the external drivers of the system. Additionally, by identifying conditions of conflicting interests between the involved actors, one can devise a roadmap of least-resistance for a policy measure to attain its goals. Our work is based on the premise that understanding and quantifying the monetary flows in the electricity market can contribute to the efficiency assessment of policy interventions in the market. We present a structured analytical framework and the results of a quantitative analysis, based on available public domain data, for the identification of the main drivers and interactions that governed the major monetary flows in the Greek wholesale electricity market, from 2009 to 2013 and the ex-post assessment of the market impact of the feed-in-tariffs scheme that was in place during this period.

scholarly journals A retrospective assessment of the costs of EPA’s 1998 Locomotive Emission Standards

2014 ◽  
Vol 5 (2) ◽  
pp. 285-314 ◽  
Author(s):  
Elizabeth Kopits
Keyword(s):  
Cost Analysis ◽  
Total Cost ◽  
Benefit Cost Analysis ◽  
Retrospective Assessment ◽  
Emission Standards ◽  
Ex Post ◽  
Data Limitations ◽  
The Cost ◽  
Benefit Cost ◽  
Benefits And Costs

Abstract:While the need to update EPA benefit-cost analysis to reflect the most recent science is broadly acknowledged, little work has been done examining how well ex ante BCAs estimate the actual benefits and costs of regulations. This paper adds to the existing literature on ex post cost analyses by examining EPA’s analysis of the 1998 Locomotive Emission Standards. Due to data limitations and minimal ability to construct a reasonable counterfactual for each component of the cost analysis, the assessment relies mainly on industry expert opinion, augmented with ex post information from publicly available data sources when possible. The paper finds that the total cost of bringing line-haul locomotives into compliance with the 1998 Locomotive Emission Standards rule remains uncertain. Even though the initial per-unit locomotive compliance costs were higher than predicted by EPA, total costs also depend on the number of locomotives affected by the regulation. Over 2000–2009, the number of newly built line-haul locomotives was higher but the number of remanufactured line-haul locomotives was lower than EPA’s estimate.

scholarly journals Is Trading Fast Dangerous?

2018 ◽  
pp. 9-27 ◽  
Author(s):  
Thierry Foucault ◽  
Sophie Moinas
Keyword(s):  
Financial Markets ◽  
Adverse Selection ◽  
Policy Making ◽  
Information Technologies ◽  
Empirical Literature ◽  
Market Quality ◽  
Gains From Trade ◽  
Adverse Selection Costs

This chapter discusses the findings of the growing theoretical and empirical literature on trading speed in financial markets. The speed of trading has increased significantly in recent years, due to progress in information technologies and automation of the trading process. This evolution raises many questions about the effects of trading speed. It is argued that an increase in trading speed raises adverse selection costs but increases competition among liquidity providers and the rate at which gains from trade are realized. Thus, the effect of an increase in trading speed on market quality and welfare is inherently ambiguous. This observation is important for assessing empirical findings regarding the effects of trading speed and policy-making.

scholarly journals The Efficiency of Real-World Bargaining: Evidence from Wholesale Used-Auto Auctions

2020 ◽  
Author(s):  
Bradley J Larsen
Keyword(s):  
Incomplete Information ◽  
Real World ◽  
Bilateral Trade ◽  
Efficient Frontier ◽  
Gains From Trade ◽  
Efficiency Loss ◽  
Car Industry ◽  
Ex Post ◽  
Ex Ante ◽  
Used Car

Abstract This study empirically quantifies the efficiency of a real-world bargaining game with two-sided incomplete information. Myerson and Satterthwaite (1983) and Williams (1987) derived the theoretical ex-ante efficient frontier for bilateral trade under two-sided uncertainty and demonstrated that it falls short of ex-post efficiency, but little is known about how well bargaining performs in practice. Using about 265,000 sequences of a game of alternating-offer bargaining following an ascending auction in the wholesale used-car industry, this study estimates (or bounds) distributions of buyer and seller values and evaluates where realized bargaining outcomes lie relative to efficient outcomes. Results demonstrate that the ex-ante and ex-post efficient outcomes are close to one another, but that the real bargaining falls short of both, suggesting that the bargaining is indeed inefficient but that this inefficiency is not solely due to the information constraints highlighted in Myerson and Satterthwaite (1983). Quantitatively, findings indicate that over one-half of failed negotiations are cases where gains from trade exist, leading an efficiency loss of 12–23% of the available gains from trade.

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