The (Mis)use of Information in Decentralised Markets

TL;DR

This paper examines how the availability and quality of information in decentralised markets influence allocative efficiency, revealing conditions under which increased information improves or worsens trade surplus.

Contribution

It provides a novel analysis of the effects of buyer number and information quality on market efficiency, highlighting the role of adverse selection and signal strength.

Findings

More buyers can increase trade surplus if signals are unbounded.

Better information about accepted trades raises surplus, but about rejected trades can lower it.

For binary signals, good news boosts surplus while bad news can reduce it.

Abstract

A seller offers an asset in a decentralised market. Buyers have private signals about their common value. I study whether the market becomes allocatively more efficient with (i) more buyers, (ii) better-informed buyers. Both increase the information available about buyers' common value, but also the adverse selection each buyer faces. With more buyers, trade surplus eventually increases and converges to the full-information upper bound if and only if the likelihood ratios of buyers' signals are unbounded from above. Otherwise, it eventually decreases and converges to the no-information lower bound. With better information about trades buyers would have accepted, trade surplus increases. With better information about trades they would have rejected, trade surplus decreases--unless adverse selection is irrelevant. For binary signals, a sharper characterisation emerges: stronger good news increase total surplus, but stronger bad news eventually decrease it.