This paper describes the role that informational imperfections in capital markets are likely to play in business cycles. It then developes a simple illustrative model of the impact of adverse selection in the equity market and the way in which this may lead to large fluctuations in the effective cost of capital in response to relatively small demand shocks. The model also derives an expression for the cost of equity capital in the presence of adverse selection and provides informational explanations for several widely observed macro-economic phenomena.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
1335.
Length: Date of creation: Jan 1985 Date of revision: Handle: RePEc:nbr:nberwo:1335
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