Reference

Dimitris Papanikolaou (University of Northwestern), “Adverse Selection, Slow Moving Capital and Misallocation”, Fédération des Banques Françaises Seminar, TSE, November 4, 2013, 12:30–14:00, room MF 323.

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.

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