Information Spillovers, Gains from Trade, and Interventions in Frozen Markets

Braz Camargo,
Kyungmin Kim &
Benjamin Lester

October 2016

WP 16-28 — The authors study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants.

Supersedes Working Paper 13-20 — Subsidizing Price Discovery.

They find a fundamental tension in maximizing welfare: While some intervention is required to restore trading, too much intervention depletes trade of its informational content. The authors characterize the optimal policy that balances these two considerations and explore how it depends on features of the environment. Their model can be used to study a program introduced in 2009 to restore information production in the market for legacy assets.

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