Informational Imperfections in the Capital Market and Macro-Economic Fluctuations

15 Pages Posted: 8 Mar 2007 Last revised: 27 Aug 2010

See all articles by Bruce C. N. Greenwald

Bruce C. N. Greenwald

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

andrew murray weiss

affiliation not provided to SSRN

Date Written: April 1984

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.The 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.

Suggested Citation

Greenwald, Bruce and Stiglitz, Joseph E. and weiss, andrew murray, Informational Imperfections in the Capital Market and Macro-Economic Fluctuations (April 1984). NBER Working Paper No. w1335. Available at SSRN: https://ssrn.com/abstract=969301

Bruce Greenwald (Contact Author)

Columbia Business School - Finance and Economics ( email )

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National Bureau of Economic Research (NBER)

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Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrew murray Weiss

affiliation not provided to SSRN

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