Memory and Markets

Giancarlo Spagnolo with Sergei Kovbasyuk in EIEF Working Paper 16/06 (March 2016)

Abstract: We analyze the effects of erasing past records on long-run outcomes in a dynamic market with heterogeneous sellers whose quality changes with time. Buyers leave positive or negative feedback on sellers with an information intermediary. When average seller quality is low, perfect records of past feedback lead to low information production and no trade in the long run. Limited records encourage information production and sustain stationary equilibria with trade when memory of positive records is short and memory of negative ones is long. The stationary equilibrium with the highest social welfare requires the memory of negative records to be limited.

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