We present a model in which banks trade toxic assets to fund investments. Adverse selection in toxic assets reduces liquidity and investment. Investment is inefficiently low because banks must sell high-quality assets below their "fair" value. We consider whether equity injections and asset...

The work discusses a basic proposition in the theory of competition in markets with adverse selection (Bester, 1985). By working out the sequence of market transactions, we show that the effectiveness of collateral in avoiding equilibrium rationing depends on an assumption of uncontestability of...

We provide several generalizations of Mailath's (1987) result that in games of asymmetric information with a continuum of types incentive compatibility plus separation implies differentiability of the informed agent's strategy. The new results extend the theory to classic models in finance such...

Principal-agent models in which the agent has access to private information before a contract is signed are a cornerstone of contract theory. We have conducted an experiment with 720 participants to explore whether the theoretical insights are reflected by the behavior of subjects in the...

In a market where sellers are heterogeneous with respect of the quality of their good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among...

Various models, such as those used in the New Economic Geography literature, employ combinations of agglomerative and repulsive forces to generate equilibria with cities and agglomeration. Can classical asymmetric information in the labor market, in the form of adverse selection, result in an...