Adverse Selection, Slow Moving Capital and Misallocation

Dimitris Papanikolaou, Brett Green and William Fuchs
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Brett Green: UC Berkeley--Haas School of Business

No 124, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: Adverse selection is commonly used to explain inefficiencies in specific markets. In this paper,we incorporate an informational asymmetry into a decentralized dynamic economy and study its implications for aggregate and sector level dynamics. We show that it leads to slow moving capital, lagged investment and persistent misallocation of resources. The mechanism can help explain why economies recover slowly, even when the shock does not affect the overall productivity or potential output. The model generates a rich set of dynamics and provides a micro-foundation for convex adjustment costs.

Date: 2014
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Journal Article: Adverse selection, slow-moving capital, and misallocation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:124

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