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American Economic Review: Vol. 103 No. 4 (June 2013)

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Lemons Markets and the Transmission of Aggregate Shocks

Article 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

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.

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Authors

Kurlat, Pablo (Stanford U)

JEL Classifications

D82: Asymmetric and Private Information; Mechanism Design
D92: Intertemporal Firm Choice and Growth, Financing, Investment, and Capacity
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


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