Belief Updating Frictions and Coordination Failure in Markets with Asymmetric Information

Belief Updating Frictions and Coordination Failure in Markets with Asymmetric Information | Research Square window.SnipcartSettings = { analytics: { enabled: false } }; (function() { var accessVector = localStorage.getItem('access_vector') || ''; window.dataLayer = window.dataLayer || []; if (accessVector) { window.dataLayer.push({ user: { profile: { profileInfo: { snid: accessVector } } } }); } })(); (function(w,d,s,l,i){w[l]=w[l]||[];w[l].push({'gtm.start':new Date().getTime(),event:'gtm.js'});var f=d.getElementsByTagName(s)[0],j=d.createElement(s),dl=l!='dataLayer'?'&l='+l:'';j.async=true;j.src='https://www.googletagmanager.com/gtm.js?id='+i+dl;f.parentNode.insertBefore(j,f);})(window,document,'script','dataLayer','GTM-K279D39R'); Browse Preprints In Review Journals COVID-19 Preprints AJE Video Bytes Research Tools Research Promotion AJE Professional Editing AJE Rubriq About Preprint Platform In Review Editorial Policies Our Team Advisory Board Help Center Sign In Submit a Preprint Cite Share Download PDF Research Article Belief Updating Frictions and Coordination Failure in Markets with Asymmetric Information Rodrigo Laera This is a preprint; it has not been peer reviewed by a journal. https://doi.org/ 10.21203/rs.3.rs-9623053/v1 This work is licensed under a CC BY 4.0 License Status: Posted Version 1 posted You are reading this latest preprint version Abstract This paper studies how heterogeneity in belief updating generates coordination failures in bilateral markets, even when information is symmetrically available. We develop a formal dynamic model in which seller and buyer update beliefs via exponentially weighted moving averages governed by viscosity parameters κS, κB ∈ (0,1). The interaction between agents with different updating speeds produces endogenous trading delays and deadweight losses that exceed those predicted by either agent’s friction alone. The coordination gap Gt=κSᵗ·α+κBᵗ·β-δ integrates both dynamics in a single tractable expression. We derive four propositions on permanent coordination failure, trading delay T*, the amplifying effect of epistemic heterogeneity (κS≠κB), and deadweight welfare loss. We then endogenize κ through a cognitive-cost minimization framework linked to rational inattention, deriving comparative statics on how κ* responds to stakes, cognitive costs, and initial biases. A quantitative calibration to a real estate market benchmark (α = 10%, β = 7.5%, δ = 4% of asset value) yields realistic trading delays of 3-15 quarters and deadweight losses of 12-54% of the gains-from-trade depending on κ. Policy simulations show that combining 30% bias reduction with a 5-percentage-point decrease in κ recovers 42% of the welfare loss. An organizational extension shows collective viscosity κorg grows super-linearly with hierarchical layers, linking firm-level coordination failure to individual belief-updating inertia. These results suggest that coordination failures may persist even under high transparency when agents differ in belief-updating speeds. JEL Classification: D82 · D83 · D91 · C73 coordination failure belief heterogeneity updating frictions asymmetric information rational inattention endogenous trading delays organizational inertia Full Text Additional Declarations No competing interests reported. Cite Share Download PDF Status: Posted Version 1 posted You are reading this latest preprint version Research Square lets you share your work early, gain feedback from the community, and start making changes to your manuscript prior to peer review in a journal. As a division of Research Square Company, we’re committed to making research communication faster, fairer, and more useful. We do this by developing innovative software and high quality services for the global research community. Our growing team is made up of researchers and industry professionals working together to solve the most critical problems facing scientific publishing. Also discoverable on Platform About Our Team In Review Editorial Policies Advisory Board Help Center Resources Author Services Accessibility API Access RSS feed Manage Cookie Preferences © Research Square 2026 | ISSN 2693-5015 (online) Privacy Policy Terms of Service Do Not Sell My Personal Information {"props":{"pageProps":{"initialData":{"identity":"rs-9623053","acceptedTermsAndConditions":true,"allowDirectSubmit":true,"archivedVersions":[],"articleType":"Research Article","associatedPublications":[],"authors":[{"id":635363274,"identity":"79f5f742-be26-44e2-9c1f-743ed520df94","order_by":0,"name":"Rodrigo Laera","email":"data:image/png;base64,iVBORw0KGgoAAAANSUhEUgAAAZAAAAAyAQMAAABI0h/eAAAABlBMVEX///8AAABVwtN+AAAACXBIWXMAAA7EAAAOxAGVKw4bAAAA6UlEQVRIiWNgGAWjYHACA4YEBgYZMPMDELOxE6mFB8RinAHSwkyMFgaoFmYISUC9eXvztg8Pftnw8Lf3Pvxs82ubPB8zA+OHjzm4tcicOVY8I7EvjUfizHFj6dy+24ZtzAzMkjO34dYiIZFjzJDYc5iH4UYag3Ruz21GoBY2Zl5itMjff8b827Lntj1xWhJ+HOYxuMHGJs3w43YiYS08x4oZEhvSeAzPpLFZ9jbcTm5jZmzG7xf25s2MP/7YyMkdP8Z848ef27bz25sPfviIRwsYMLahMBgbCKgHgT8YjFEwCkbBKBgFCAAA4RNL28aLG0cAAAAASUVORK5CYII=","orcid":"","institution":"National Scientific and Technical Research Council","correspondingAuthor":true,"prefix":"","firstName":"Rodrigo","middleName":"","lastName":"Laera","suffix":""}],"badges":[],"createdAt":"2026-05-05 23:23:26","currentVersionCode":1,"declarations":"","doi":"10.21203/rs.3.rs-9623053/v1","doiUrl":"https://doi.org/10.21203/rs.3.rs-9623053/v1","draftVersion":[],"editorialEvents":[],"editorialNote":"","failedWorkflow":false,"files":[{"id":108667896,"identity":"3c870616-2e13-49a3-95ce-5a01ea300fca","added_by":"auto","created_at":"2026-05-07 06:57:20","extension":"pdf","order_by":1,"title":"","display":"","copyAsset":false,"role":"manuscript-pdf","size":572583,"visible":true,"origin":"","legend":"","description":"","filename":"BeliefUpdatingFrictions2.0.pdf","url":"https://assets-eu.researchsquare.com/files/rs-9623053/v1_covered_81996c16-26ae-4cbd-b693-f6a672ef28c3.pdf"}],"financialInterests":"No competing interests reported.","formattedTitle":"Belief Updating Frictions and Coordination Failure in Markets with Asymmetric Information","fulltext":[],"fulltextSource":"","fullText":"","funders":[],"hasAdminPriorityOnWorkflow":false,"hasManuscriptDocX":false,"hasOptedInToPreprint":true,"hasPassedJournalQc":"","hasAnyPriority":true,"hideJournal":true,"highlight":"","institution":"","isAcceptedByJournal":false,"isAuthorSuppliedPdf":true,"isDeskRejected":"","isHiddenFromSearch":false,"isInQc":false,"isInWorkflow":false,"isPdf":true,"isPdfUpToDate":true,"isWithdrawnOrRetracted":false,"journal":{"display":true,"email":"[email protected]","identity":"researchsquare","isNatureJournal":false,"hasQc":true,"allowDirectSubmit":true,"externalIdentity":"","sideBox":"","snPcode":"","submissionUrl":"/submission","title":"Research Square","twitterHandle":"researchsquare","acdcEnabled":true,"dfaEnabled":false,"editorialSystem":"","reportingPortfolio":"","inReviewEnabled":false,"inReviewRevisionsEnabled":true},"keywords":"coordination failure, belief heterogeneity, updating frictions, asymmetric information, rational inattention, endogenous trading delays, organizational inertia","lastPublishedDoi":"10.21203/rs.3.rs-9623053/v1","lastPublishedDoiUrl":"https://doi.org/10.21203/rs.3.rs-9623053/v1","license":{"name":"CC BY 4.0","url":"https://creativecommons.org/licenses/by/4.0/"},"manuscriptAbstract":"\u003cp\u003eThis paper studies how heterogeneity in belief updating generates coordination failures in bilateral markets, even when information is symmetrically available. We develop a formal dynamic model in which seller and buyer update beliefs via exponentially weighted moving averages governed by viscosity parameters κS, κB ∈ (0,1). The interaction between agents with different updating speeds produces endogenous trading delays and deadweight losses that exceed those predicted by either agent’s friction alone. The coordination gap Gt=κSᵗ·α+κBᵗ·β-δ integrates both dynamics in a single tractable expression. We derive four propositions on permanent coordination failure, trading delay T*, the amplifying effect of epistemic heterogeneity (κS≠κB), and deadweight welfare loss. We then endogenize κ through a cognitive-cost minimization framework linked to rational inattention, deriving comparative statics on how κ* responds to stakes, cognitive costs, and initial biases. A quantitative calibration to a real estate market benchmark (α = 10%, β = 7.5%, δ = 4% of asset value) yields realistic trading delays of 3-15 quarters and deadweight losses of 12-54% of the gains-from-trade depending on κ. Policy simulations show that combining 30% bias reduction with a 5-percentage-point decrease in κ recovers 42% of the welfare loss. An organizational extension shows collective viscosity κorg grows super-linearly with hierarchical layers, linking firm-level coordination failure to individual belief-updating inertia. 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