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I study bargaining over prices between two investors in financial over-the-counter markets with asymmetric information. I focus on environments in which an asset owner has private information about both her liquidity state and asset quality, and so a buyer is uncertain about the owner's true motive for selling--whether it is because of a liquidity need or because of a low asset valuation. I apply the concept of neutral bargaining solution to characterize the prices at which the investors trade with each other. I illustrate the implications for asset prices in over-the-counter markets where private information may be prevalent.

Abstract:We study forecast dispersion in a finite-player forecasting game modeled as an aggregate game with payoff externalities and dispersed information. In the game, each agent cares about being accurate as well as about the distance of his forecast from the average forecast; and with a finite number of agents, the agents can strategically influence that average. We show that the finiteness of the number of agents weakens the strategic effect induced by the underlying preference. We find that when each agent prefers to be close to the average forecast, the presence of strategic manipulation of the average forecast contributes to a higher forecast dispersion; when instead each agent wants to be distinctive from the average, the opposite is true.

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