Imperfect Information Transmission and Adverse Selection in Asset Markets

This paper studies asset markets where buyers of assets do not inherit private information from previous owners and must learn asset quality over time. Imperfect information transmission reduces asymmetric information, but also reduces the trading volume, prices and efficiency. This result is contrary to the traditional view that information asymmetry hurts trade. Moreover, when trading opportunities are abundant, it is socially optimal for owners to receive private information instantaneously; otherwise, information suppression is optimal