I extend Akerlof's (1970) adverse selection model, where uninformed participants withdraw from the market, and show that rather than collapse, "lemons" can, and often do, lead to a negative bubble. A mirror image of his model, where uninformed participants pursue "dreams" (for example,...

Prompted by the recent US experience, in this chapter, we study the interaction between cycles in credit markets and cycles in housing markets. There is a large growing literature exploring two different approaches: on the one hand, a boom–bust in house prices can generate a boom–bust in...

This paper presents a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved. The equilibrium is efficient, and the paradoxes associated with fully revealing rational expectations...

This paper presents a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved. The equilibrium is efficient, and the paradoxes associated with fully revealing rational expectations...

This paper presents a market with asymmetric information where a privately revealing equilibrium obtains in a competitive framework and where incentives to acquire information are preserved. The equilibrium is efficient, and the paradoxes associated with fully revealing rational expectations...

Little is known about perceptions of medical expenditure risks despite their presumed relevance to health insurance demand. This paper reports on a unique elicitation of subjective probabilities of medical expenditures from rural Ethiopians who are offered the opportunity to purchase health...

The hypothesis that financial markets punish traders who make relatively inaccurate forecasts and eventually eliminate the effect of their beliefs on prices is of fundamental importance to the standard modeling paradigm in asset pricing. We establish straightforward necessary and sufficient...

Toxic arbitrage opportunities are caused by information arriving in one market leading to short lived price deviations between markets. This paper shows that the direction of such arbitrage opportunities provides valuable insights into price discovery and markets' information shares. Starting...

Short lived arbitrage opportunities arise when prices adjust with a lag to new information. They are toxic because they expose dealers to the risk of trading at stale quotes. Hence, theory implies that more frequent toxic arbitrage opportunities and a faster arbitrageurs' response to these...

Why do some markets remain illiquid even when there is a positive gain from trade? In order to understand the real determinants of market liquidity in decentralized markets, we are going to analyze this question in a competitive market setting when both search frictions and adverse selection...