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Lemons Markets and the Transmission of Aggregate Shocks

  • Pablo Kurlat
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    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.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.103.4.1463
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    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 103 (2013)
    Issue (Month): 4 (June)
    Pages: 1463-89

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    Handle: RePEc:aea:aecrev:v:103:y:2013:i:4:p:1463-89
    Note: DOI: 10.1257/aer.103.4.1463
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    16. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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    18. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    19. Bigelow, John P., 1990. "Efficiency and adverse selection," Journal of Economic Theory, Elsevier, vol. 52(2), pages 380-405, December.
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