Working Paper: NBER ID: w1335
Authors: Bruce Greenwald; Joseph E. Stiglitz; Andrew Weiss
Abstract: This paper describes the role that informational imperfections in capital markets are likely to play in business cycles. It then developes a simple illustrative model of the impact of adverse selection in the equity market and the way in which this may lead to large fluctuations in the effective cost of capital in response to relatively small demand shocks. \nThe model also derives an expression for the cost of equity capital in the presence of adverse selection and provides informational explanations for several widely observed macro-economic phenomena.
Keywords: Informational Imperfections; Capital Market; Macroeconomic Fluctuations; Adverse Selection
JEL Codes: D82; E32; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adverse selection (D82) | effective cost of capital (G31) |
| credit constraints (E51) | investment (G31) |
| adverse selection (D82) | riskiness of projects (G11) |
| riskiness of projects (G11) | effective marginal cost of capital (G31) |