Investing in Trading Opportunities in Dynamic Adverse Selection

Abstract

I analyse a market with asymmetric information, interdependent values and trade frictions. The frictions can be reduced at a cost, e.g. by increasing attention, search, lobbying or computing power. For some parameters, there is a unique equilibrium in which an increase in the gains from trade delays trade. A rise in the trading surplus may reduce the payoff of all types. The driving force is a novel feedback loop between the endogenous trading frictions and the signalling motive.