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Lemons Markets and the Transmission of Aggregate Shocks (2013)
| Venue: | American Economic Review |
| Citations: | 26 - 1 self |
BibTeX
@ARTICLE{Kurlat13lemonsmarkets,
author = {Pablo Kurlat and Sergi Basco and Francisco Buera and Guido Lorenzoni and Monika Piazzesi and Krishna Rao and Julio Rotemberg and Martin Schneider},
title = {Lemons Markets and the Transmission of Aggregate Shocks},
journal = {American Economic Review},
year = {2013}
}
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Abstract
I study a dynamic economy featuring adverse selection in asset markets. Borrowing-constrained entrepreneurs sell past projects to nance new investment, but asymmetric information creates a lemons problem. I show that this friction is equivalent to a tax on nancial transactions. The implicit tax rate responds to aggregate shocks, amplifying the response of the real economy and generating cyclical variation in various measures of liquidity. Financial markets are fragile, volatile and occasionally shut down entirely. The extent to which this instability is related to real economic variables is an important open question for macroeconomics. In this paper I develop a model of nancial imperfections to explain how instability can result from macroeconomic shocks and in turn amplify and propagate them. I focus on one specic nancial market imperfection: asymmetric information about the quality of assets. There are several reasons for this focus. First, both in theory (Hart and Moore 1994, Kiyotaki and Moore 1997) and in practice, assets of various kinds are extensively used to enable intertemporal transactions. If there is asymmetric information about asset qualities, which is a natural assumption, this has the potential to interfere with a large subset of nancial transactions. Second, asymmetric information is a central concern in corporate nance. Following Myers and Majluf (1984), asymmetry of information between rm managers and their outside investors is seen as a key determinant of rms ' capital structure. Third, I am deeply indebted to George-Marios Angeletos, Ricardo Caballero, Bengt Holmstrom and especially Ivan
Keyphrases
asymmetric information lemon market aggregate shock nancial transaction adverse selection macroeconomic shock turn amplify real economy specic nancial market imperfection various measure capital structure borrowing-constrained entrepreneur corporate nance financial market several reason implicit tax rate responds george-marios angeletos asset quality bengt holmstrom real economic variable central concern nancial imperfection new investment asset market lemon problem natural assumption cyclical variation outside investor large subset various kind past project important open question intertemporal transaction key determinant rm manager ricardo caballero dynamic economy
