EMPCT Working Paper Series No. 2024-03
106 pages | PDF Download | PDF in Browser
Citation:
Bierdel, Aimé, Andres Drenik, Juan Herreño, and Pablo Ottonello, “Illiquid Lemon Markets and the Macroeconomy” October, 2024
Aimé Bierdel
Columbia University
Andres Drenik
UT Austin
Juan Herreño
UC San Diego
Pablo Ottonello
University of Maryland and NBER
Abstract
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.
