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Adverse Selection, Slow Moving Capital and Misallocation

Author

Listed:
  • Dimitris Papanikolaou

    (Northwestern University)

  • Brett Green

    (UC Berkeley--Haas School of Business)

  • William Fuchs

    (University of California - Berkeley)

Abstract

Adverse selection is commonly used to explain inefficiencies in specific markets. In this paper,we incorporate an informational asymmetry into a decentralized dynamic economy and study its implications for aggregate and sector level dynamics. We show that it leads to slow moving capital, lagged investment and persistent misallocation of resources. The mechanism can help explain why economies recover slowly, even when the shock does not affect the overall productivity or potential output. The model generates a rich set of dynamics and provides a micro-foundation for convex adjustment costs.

Suggested Citation

  • Dimitris Papanikolaou & Brett Green & William Fuchs, 2014. "Adverse Selection, Slow Moving Capital and Misallocation," 2014 Meeting Papers 124, Society for Economic Dynamics.
    • Handle: RePEc:red:sed014:124
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    3. Sun, Yibo & Wang, Bo, 2020. "Tax on name," Economics Letters, Elsevier, vol. 190(C).
    4. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    5. Maurin, Laurent & Wolski, Marcin, 2021. "Aggregate productivity slowdown in Europe: New evidence from corporate balance sheets," EIB Working Papers 2021/04, European Investment Bank (EIB).
    6. Bajaj, Ayushi, 2018. "Undefeated equilibria of the Shi–Trejos–Wright model under adverse selection," Journal of Economic Theory, Elsevier, vol. 176(C), pages 957-986.
    7. Chibane, Messaoud & Gabriel, Amadeus & Giménez Roche, Gabriel A., 2022. "Credit booms and crisis-emergent asset comovement: The problem of latent correlation," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 270-279.
    8. Nishihara, Michi & Shibata, Takashi, 2018. "Dynamic bankruptcy procedure with asymmetric information between insiders and outsiders," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 118-137.
    9. Cui, Wei, 2017. "Macroeconomic effects of delayed capital liquidation," LSE Research Online Documents on Economics 86156, London School of Economics and Political Science, LSE Library.
    10. Martel, Jordan, 2018. "Quality, price, and time-on-market," Economics Letters, Elsevier, vol. 171(C), pages 97-101.
    11. Guerrazzi, Marco & Candido, Giuseppe, 2023. "The determination of the price of capital goods: A differential game approach," MPRA Paper 119118, University Library of Munich, Germany.
    12. Amin, Shehryar & Tédongap, Roméo, 2023. "The changing landscape of treasury auctions," Journal of Banking & Finance, Elsevier, vol. 148(C).
    13. Cun, Wukuang, 2022. "Endogenous lemons markets and information cycles," Journal of Economic Dynamics and Control, Elsevier, vol. 141(C).
    14. Jordan Martel & Kenneth Mirkin & Brian Waters, 2022. "Learning by Owning in a Lemons Market," Journal of Finance, American Finance Association, vol. 77(3), pages 1737-1785, June.
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    16. Adelino, Manuel & Gerardi, Kristopher & Hartman-Glaser, Barney, 2019. "Are lemons sold first? Dynamic signaling in the mortgage market," Journal of Financial Economics, Elsevier, vol. 132(1), pages 1-25.

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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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