Dynamic adverse selection and asset sales. (Job Market Paper) This paper presents a model of dynamic trading in OTC markets. Investors meet over-the-counter to trade heterogeneous assets under asymmetric information. The cream-skimming effect emerges due to the heterogeneous information among buyers, where the low-type seller strategically forgoes trading opportunities with gains from trade in order to take advantage of the uninformed buyers in the market. In equilibrium, the price and volume depend on not only about initial prior about the asset quality but also about future liquidity and market condition. The implications and predictions on initial public offerings, transparency in OTC markets are discussed in the paper.
Secret Scouting (with Xuelin Li) [PDF][Slides] VCs prefer secrecy when searching for targets. As a result, only the investments inviable startups are disclosed, but the failed ones are discarded silently. We extend the standard preemption game to explain the efficiency loss and the individual rationale of doing so. We show that secrecy creates pessimism. Compared to the fully disclosing case, VCs will stop hunting for startups too early in an initially promising industry. This could happen even if no technology failures are observed in realization. However, hiding failures becomes a dominant strategy when the return of the VC industry is right-skewed. VCs use secret scouting to make the competitors believe that the industry is a dead end and reduce the preemption threats.