Econometrica: May 2014, Volume 82, Issue 3
Decentralized Trading With Private Information
Mikhail Golosov, Guido Lorenzoni, Aleh TsyvinskiThe paper studies how asset prices are determined in a decentralized market with asymmetric information about asset values. We consider an economy in which a large number of agents trade two assets in bilateral meetings. A fraction of the agents has private information about the asset values. We show that, over time, uninformed agents can elicit information from their trading partners by making small offers. This form of experimentation allows the uninformed agents to acquire information as long as there are potential gains from trade in the economy. As a consequence, the economy converges to a Pareto efficient allocation.
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