No abstract

No abstract

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.

We study a bargaining model in which a buyer makes frequent offers to a privately informed seller, while gradually learning about the seller’s type from “news.” We show that the buyer’s ability to leverage this information to extract more surplus from the seller is remarkably limited. In fact, the buyer gains nothing from the ability to negotiate a better price despite the fact that a negotiation must take place in equilibrium. During the negotiation, the buyer engages in a form of costly “experimentation” by making offers that are sure to earn her negative payoffs if accepted, but speed up learning and improve her continuation payoff if rejected. We investigate the effects of market power by comparing our results to a setting with competitive buyers. Both efficiency and the seller’s payoff can decrease by introducing competition among buyers. (JEL C78, D82, D83)

No abstract