Asset Markets with Heterogeneous Information, Econometrica, forthcoming

Pablo Kurlat

I define a notion of competitive equilibrium for asset markets where assets are heterogeneous and traders have heterogenoeus information about them. Markets are defined by a price and a procedure for clearing trades. Any asset can in principle be traded in any market but traders can use their information to impose acceptance rules which specify which goods they are willing to trade in each market. I then apply this notion to a model of distressed sales under asymmetric information and examine whether it can account for fire sales: sharp drops in prices when distressed agents need to sell assets. Standard models of asymmetric information with informed sellers, heterogenous assets and identical uninformed buyers predict the opposite phenomenon, as more distressed sellers on average sell less-adversely-selected pools of assets. With heterogeneity among buyers in their ability to distinguish assets of different qualities, the possibility of fire sales depends on the joint distribution of wealth and ability.