How Optimism Leads to Price Discovery and Efficiency in a Dynamic Matching Market

Abstract We study a market search equilibrium with aggregate uncertainty, private information and heterogeneus beiefs. Traders initially start out optimistic and then update their beliefs based on their matching experience in the market, using the Bayes rule. It is shown that all separating equilibria converge to perfect competition in the limit as the time between matches tends to 0. We also establish existence of a separating equilibrium.

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Year of publication:	2010-10-23
Authors:	Majumdar, Dipjyoti ; Shneyerov, Art ; Xie, Huan
Institutions:	Vancouver School of Economics
Subject:	Markets with search frictions \| aggregate uncertainty \| heterogeneous beliefs \| optimism \| bargaining \| foundations of Walrasian equilibrium

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Extent:	application/pdf
Series:	Microeconomics.ca working papers.
Type of publication:	Book / Working Paper
Language:	English
Notes:	41 pages
Classification:	C73 - Stochastic and Dynamic Games ; C78 - Bargaining Theory; Matching Theory ; D83 - Search, Learning, Information and Knowledge
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10008670274