Asset Illiquidity and Market Shutdowns in Competitive Equilibrium

Hajime Tomura

Review of Economic Dynamics, 2012, vol. 15, issue 3, 283-294

Abstract: This paper introduces asymmetric information into a competitive asset market in a dynamic general-equilibrium model with borrowing constraints. In the presence of borrowing constraints, asset sales become a crucial means for agents to finance opportunities to invest in new assets. In this environment, reduced asset sales due to asymmetric information lower the economic growth rate if agents invest in new assets. The volume of asset trade, however, becomes zero if and only if agents stop investing in new assets because of sufficiently low aggregate productivity. A low economic growth rate in this case is solely due to low aggregate productivity without any role of the market shutdown. (Copyright: Elsevier)

Keywords: Adverse selection; asset price; liquidity; market shutdown; economic growth (search for similar items in EconPapers)
JEL-codes: D82 F44 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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DOI: 10.1016/j.red.2012.02.003

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