Information percolation in segmented markets

We study equilibria of dynamic over-the-counter markets in which agents are distinguished by their preferences and information. Over time, agents are privately informed by bids and offers. Investors differ with respect to information quality, including initial information precision, and also in terms of market “connectivity,” the expected frequency of their bilateral trading opportunities. We characterize endogenous information acquisition and show how learning externalities affect information gathering incentives. More “liquid” markets lead to higher equilibrium information acquisition when the gains from trade and market duration are sufficiently large. On the other hand, for a small market duration, the opposite may occur if agents vary sufficiently in terms of their market connectivity. Duffie is at the Graduate School of Business, Stanford University and is an NBER Research Associate. Malamud is at the Swiss Finance Institute and at EPF Lausanne. Manso is at the Haas School of Business at UC Berkeley. We are grateful for research assistance from Xiaowei Ding, Michelle Ton, and Sergey Lobanov, and for discussion with Daniel Andrei, Luciano I. de Castro, Julien Cujean, Peter DeMarzo, Eiichiro Kazumori, and Phil Reny. Malamud gratefully acknowledges financial support by the National Centre of Competence in Research “Financial Valuation and Risk Management” (NCCR FINRISK).