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Efficient Lemons

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  • Uras, Rasim Burak
  • Wagner, Wolf

Abstract

We show that asset opacity can improve the efficiency of investment in the economy. We consider a model where underinvestment arises from speculative cash-hoardings aiming to benefit from fire-sale prices. Whereas opacity provides no benefit to asset originators in the case of isolated liquidations, this is not the case when collective liquidations lead to fire-sale prices ("cash-in-the market" pricing). As cash-in-the-market prices are set to reflect shortages of liquidity and not expected asset quality, originators can sell low quality assets opportunistically. This raises the ex-ante benefit from asset origination and reduces liquidity hoarding. The model suggests that a "seemingly undesirable" feature at the asset level can improve economic efficiency, due to a general equilibrium effect.

Suggested Citation

  • Uras, Rasim Burak & Wagner, Wolf, 2017. "Efficient Lemons," CEPR Discussion Papers 11803, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:11803
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Adverse Selection; cash-in-the-market pricing; opacity; underinvestment;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G2 - Financial Economics - - Financial Institutions and Services
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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