Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/217075 
Year of Publication: 
2019
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 14 [Issue:] 1 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2019 [Pages:] 297-343
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
We study a discriminatory limit-order book in which market makers compete in nonlinear tariffs to serve a privately informed insider. Our model allows for general nonparametric specifications of preferences and arbitrary discrete distributions for the insider's private information. Adverse selection severely restricts equilibrium outcomes: in any pure-strategy equilibrium with convex tariffs, pricing must be linear and at most one type can trade, leading to an extreme form of market breakdown. As a result, such equilibria only exist under exceptional circumstances that we fully characterize. These results are strikingly different from those of existing analyses that postulate a continuum of types. The two approaches can be reconciled when we consider E-equilibria of games with a large number of market makers or a large number of types.
Subjects: 
Adverse selection
competing mechanisms
limit-order book
JEL: 
D43
D82
D86
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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