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  3. American Economic Review
  4. June 2013
  5. Lemons Markets and the Transmission of Aggregate Shocks

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Lemons Markets and the Transmission of Aggregate Shocks

  • Pablo Kurlat
American Economic Review
vol. 103, no. 4, June 2013
(pp. 1463–89)
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Abstract

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.

Citation

Kurlat, Pablo. 2013. "Lemons Markets and the Transmission of Aggregate Shocks." American Economic Review, 103 (4): 1463–89. DOI: 10.1257/aer.103.4.1463

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • D25 Intertemporal Firm Choice, Investment, Capacity, and Financing
  • E32 Business Fluctuations; Cycles
  • E44 Financial Markets and the Macroeconomy
  • G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
  • L15 Information and Product Quality; Standardization and Compatibility