TY - JOUR
T1 - Adverse selection, slow-moving capital, and misallocation
AU - Fuchs, William
AU - Green, Brett
AU - Papanikolaou, Dimitris
N1 - Funding Information:
We are grateful to Andy Atkeson, Marty Eichenbaum, Andrea Eisfeldt, Joao Gomes, Zhiguo He, Pierre-Olivier Gourinchas, Boyan Jovanovic, Arvind Krishnamurthy, Lars-Alexander Kuehn, Pablo Kurlat, Stavros Panageas, Adriano Rampini, Lukas Schmid, Amit Seru, Andrzej Skrzypacz, and Vish Vishwanathan for useful comments and feedback. We also thank conference participants at the Duke-University of North Carolina Asset Pricing Conference, European Summer Symposium in Financial Markets, Foundation for the Advancement of Research in Financial Economics, National Bureau of Economic Research, Texas Finance Festival, Society of Economic Dynamics, and Stanford Institute of Theoretical Economics. Finally, we thank seminar participants at University of California at Berkeley, University of Chicago, Duke University, Ecole Polytechnique Fédérale de Lausanne, MIT Sloan School of Management, Northwestern University, San Francisco Federal Reserve, Toulouse School of Economics, University of British Columbia, University of California at Los Angeles, and Washington University in St. Louis for useful conversations and comments. We are grateful to Andreas Neuhierl for excellent research assistance. William Fuchs acknowledges support from the National Science Foundation (Grant 1260890 ).
Publisher Copyright:
© 2016 Elsevier B.V..
PY - 2016/5/1
Y1 - 2016/5/1
N2 - We embed adverse selection into a dynamic, general equilibrium model with heterogeneous capital and study its implications for aggregate dynamics. The friction leads to delays in firms' divestment decisions and thus slow recoveries from shocks, even when these shocks do not affect the economy's potential output. The impediments to reallocation increase with the dispersion in productivity and decrease with the interest rate, the frequency of sectoral shocks, and households' consumption smoothing motives. When households are risk averse, delaying reallocation serves as a hedge against future shocks, which can lead to persistent misallocation. Our model also provides a micro-foundation for convex adjustment costs and a link between the nature of these costs and the underlying economic environment.
AB - We embed adverse selection into a dynamic, general equilibrium model with heterogeneous capital and study its implications for aggregate dynamics. The friction leads to delays in firms' divestment decisions and thus slow recoveries from shocks, even when these shocks do not affect the economy's potential output. The impediments to reallocation increase with the dispersion in productivity and decrease with the interest rate, the frequency of sectoral shocks, and households' consumption smoothing motives. When households are risk averse, delaying reallocation serves as a hedge against future shocks, which can lead to persistent misallocation. Our model also provides a micro-foundation for convex adjustment costs and a link between the nature of these costs and the underlying economic environment.
KW - Adverse selection
KW - Convex adjustment costs
KW - General equilibrium
KW - Misallocation
UR - http://www.scopus.com/inward/record.url?scp=84962423382&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84962423382&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2016.01.001
DO - 10.1016/j.jfineco.2016.01.001
M3 - Article
AN - SCOPUS:84962423382
SN - 0304-405X
VL - 120
SP - 286
EP - 308
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -