Efficient Lemons

Wolf Wagner () and Burak Uras

No 11803, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Opacity; Cash-in-the-market pricing; Adverse selection; Underinvestment (search for similar items in EconPapers)
JEL-codes: E44 G2 O16 O47 (search for similar items in EconPapers)
Date: 2017-01
New Economics Papers: this item is included in nep-mac
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