Illiquid Lemon Markets and the Macroeconomy

Aimé Bierdel, Andres Drenik, Juan Herreño and Pablo Ottonello

No 31711, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D82 E22 E32 (search for similar items in EconPapers)
Date: 2023-09
New Economics Papers: this item is included in nep-fdg, nep-ger and nep-opm
Note: AP EFG IFM ME
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