Illiquid Lemon Markets and the Macroeconomy

Summary

We study the macroeconomic implications of asymmetric information in capital markets. We build a quantitative capital-accumulation model in which capital is traded in illiquid markets, with sellers having more information about capital quality than buyers. Asymmetric information distorts the terms of trade for sellers of high-quality capital, who list higher prices and are willing to accept lower trading probabilities to signal their type. Led by the model's predictions, we measure the distortions from asymmetric information by studying the relationship between listed prices and trading probabilities in a unique dataset of individual capital units listed for trade. By combining the empirical measurement with the model, we show that information asymmetries can play a quantitatively large role during economic crises when the degree of asymmetric information deteriorates.

Creators/Authors

Aimé Bierdel

Andres Drenik

Juan Herreño

Pablo Ottonello

Tags

business cycles macroeconomics microeconomics asset pricing monetary economics economics of information economic fluctuations and growth international finance and macroeconomics consumption and investment