Working Paper: NBER ID: w18358
Authors: Michael J. Fishman; Jonathan A. Parker
Abstract: We study a market for funding real investment in which valuation creates information on which adverse selection can occur. Unlike in previous models, higher amounts of valuation are associated with lower market prices and so greater returns to valuation, and this strategic complementarity in the capacity to do valuation generates multiple equilibria. In this region, the equilibrium without valuation is always more efficient despite funding projects that valuation would reveal as unprofitable. Valuation equilibria look like credit crunches. A large investor can ensure the efficient equilibrium only if it can precommit to a price and, for some parameters, only if subsidized.
Keywords: Valuation; Adverse Selection; Market Collapses
JEL Codes: E44; G01; G2; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher valuation levels (G19) | Lower market prices (D49) |
| Lower market prices (D49) | Less efficient equilibrium (D59) |
| Higher valuation levels (G19) | Less efficient equilibrium (D59) |
| Higher valuation levels (G19) | Adverse selection (D82) |
| Adverse selection (D82) | Market collapse (G01) |
| More assets valued (G19) | Decline in average quality of unvalued assets (G19) |
| Decline in average quality of unvalued assets (G19) | Lower prices (D49) |
| Absence of valuation (D46) | Better social outcomes (I14) |
| Policy interventions (subsidies or taxes) (H23) | Altered causal dynamics (C69) |