Lemons Markets and the Transmission of Aggregate Shocks
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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Volume (Year): 103 (2013)
Issue (Month): 4 (June)
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