Lemons Markets and the Transmission of Aggregate Shocks
American Economic Review · 2013 · Volume 103 · Issue 4
Abstract
I study a dynamic economy featuring adverse selection in asset markets. Borrowing-constrained entrepreneurs sell past projects to finance new investment, but asymmetric information creates a lemons problem. I show that this friction is equivalent to a tax on financial transactions. The implicit tax rate responds to aggregate shocks, generating amplification in the response of investment and cyclical variation in liquidity.
Keywords
Asymmetric and Private Information, Mechanism Design, Intertemporal Firm Choice, Investment, Capacity, and Financing, Business Fluctuations, Cycles, Financial Markets and the Macroeconomy, Capital Budgeting, Fixed Investment and Inventory Studies, Information and Product Quality, Standardization and Compatibility
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