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Efficient Lemons

34 Pages Posted: 24 Jan 2017  

Burak Uras

Tilburg University - Center for Economic Research (CentER); Tilburg University - Department of Economics

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: January 23, 2017

Abstract

We show that asset opacity can improve the efficiency of investment in the economy. We consider a model where underinvestment arises from speculative cash-hoardings aiming to benefit from fire-sale prices. Whereas opacity provides no benefit to asset originators in the case of isolated liquidations, this is not the case when collective liquidations lead to fire-sale prices ("cash-in-the market" pricing). As cash-in-the-market prices are set to reflect shortages of liquidity and not expected asset quality, originators can sell low quality assets opportunistically. This raises the ex-ante benefit from asset origination and reduces liquidity hoarding. The model suggests that a "seemingly undesirable" feature at the asset level can improve economic efficiency, due to a general equilibrium effect.

Keywords: Opacity, Cash-In-The-Market Pricing, Adverse Selection, Underinvestment

JEL Classification: E44, G2, O16, O47

Suggested Citation

Uras, Burak and Wagner, Wolf, Efficient Lemons (January 23, 2017). Available at SSRN: https://ssrn.com/abstract=2904265 or http://dx.doi.org/10.2139/ssrn.2904265

Burak Uras

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Wolf Wagner (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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