Working Paper: NBER ID: w31711
Authors: Aim Bierdel; Andres Drenik; Juan Herreo; Pablo Ottonello
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.
Keywords: asymmetric information; capital markets; macroeconomics; illiquid markets
JEL Codes: D82; E22; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asymmetric information in capital markets (D82) | distorts the terms of trade for high-quality capital sellers (F16) |
| distorted terms of trade for high-quality capital sellers (F14) | higher prices and lower trading probabilities (G19) |
| higher prices and lower trading probabilities (G19) | lower capital stock (E22) |
| higher prices and lower trading probabilities (G19) | higher unemployment rate of capital (E24) |
| higher information asymmetries (D82) | lower aggregate investment (E22) |
| higher information asymmetries (D82) | higher share of idle capital (E22) |
| higher information asymmetries (D82) | lower average quality of employed capital (D29) |
| unobserved quality (L15) | high-quality sellers signal their quality by pricing their units high (L15) |
| high-quality sellers pricing their units high (R31) | reduced buyer interest and trading probabilities (G19) |
| cyclical properties of asymmetric information (D82) | strong comovement with economic activity (E32) |
| policies aimed at reducing information asymmetries (D82) | stabilizing economic downturns (E63) |