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APT-3: Market Structure, Information, and Learning
Information and Competition with Symmetry
1University of Maryland; 2Washington University in St. Louis
This paper investigates the strategic foundations for rational expectations equilibrium. In the model, risk-averse traders with two signal - private information and endowment shocks - submit demand schedules to trade a risky asset. Traders are divided into groups. Within groups, traders share common signals; signals are different across different groups. Either traders become price takers or the price becomes fully revealing, but not both, as the number of competitors per group goes to infinity. As the number of groups goes to infinity, neither price taking nor fully revealing prices are obtained. Measuring competition by the quantity traded as a fraction of that traded by a price-taker, we show that optimal exercise of market power has opposite implications for competition and price informativeness.
How Auctions Amplify House-Price Fluctuations
Johns Hopkins University
I develop a tractable dynamic model of the housing market where the prices are determined in auctions rather than by Nash bargaining as in the housing search model from the literature. The model with auctions mimics the actual housing markets by generating fluctuations between the booms and busts. During the boom multiple buyers compete for each house, while in the bust buyers are choosing between several available houses. The model produces highly volatile house prices, improving on the benchmark housing search model and helping to solve the puzzle of excess volatility of house prices. This high volatility arises in the auction model because of the competition between buyers with heterogenous values. With heterogenous values, the method of choosing the buyer among all the interested buyers becomes important for the quantitative properties of the model. In the benchmark model with Nash bargaining, the buyer is chosen randomly among all interested buyers. Then the average of buyers' house values determines the house price. In the auction model the buyer is chosen by the maximum bid among all interested buyers, so the highest value determines the house prices. During the housing booms, the highest values increase more than the average values, making the sales price more volatile. This high volatility is efficient, since the equilibrium in the model decentralizes the solution of the social planner problem, constrained by the search frictions.
Learning Through Crowdfunding
Imperial College Business School
This paper examines the role of reward-based crowdfunding in learning about demand and improving investment decisions. The information gathered while raising funds from consumers provides firms with a real option to invest if demand is sufficiently high. Despite moral hazard problems stemming from the firms' ability to divert the funds raised, all-or-nothing schemes are nearly as efficient as frictionless surveys and full money-back guarantees. Dominant platforms adopt features such as limited campaign length and transparency between backers, which are essential to overcome moral hazard. Our results are consistent with stylized facts and provide new testable implications.
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Conference: EFA 2017
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