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Ariel Zetlin-Jones

Bio: Ariel Zetlin-Jones is an academic researcher from Carnegie Mellon University. The author has contributed to research in topics: Adverse selection & Debt. The author has an hindex of 10, co-authored 32 publications receiving 310 citations. Previous affiliations of Ariel Zetlin-Jones include University of Minnesota & Federal Reserve Bank of Minneapolis.

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TL;DR: In this paper, a search-theoretic model of imperfect competition is incorporated into a standard model of asymmetric information with unrestricted contracts, and the authors characterize the unique equilibrium, and use their characterization to explore the interaction between adverse selection, screening, and imperfect competition.
Abstract: We incorporate a search-theoretic model of imperfect competition into a standard model of asymmetric information with unrestricted contracts. We characterize the unique equilibrium, and use our characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show that the relationship between an agent?s type, the quantity he trades, and the price he pays is jointly determined by the severity of adverse selection and the concentration of market power. Therefore, quantifying the effects of adverse selection requires controlling for market structure. We also show that increasing competition and reducing informational asymmetries can decrease welfare.

56 citations

Journal ArticleDOI
TL;DR: This article developed a model with adverse selection and reputation that is consistent with such fluctuations in the volume of new issuances in secondary loan markets, and described policies that can implement efficient outcomes unless collateral values are low and originators reputational levels are low.
Abstract: The volume of new issuances in secondary loan markets fluctuates over time and falls when collateral values fall. We develop a model with adverse selection and reputation that is consistent with such fluctuations. Adverse selection ensures that the volume of trade falls when collateral values fall. Without reputation, the equilibrium has separation, adverse selection is quickly resolved and trade volume is independent of collateral value. With reputation, the equilibrium has pooling and adverse selection persists over time. The equilibrium is efficient unless collateral values are low and originators reputational levels are low. We describe policies that can implement efficient outcomes.

53 citations

ReportDOI
TL;DR: In this article, the authors developed a dynamic adverse selection model in which small reductions in collateral values can generate abrupt inefficient collapses in new issuances in the secondary loan market, which is viewed by policymakers as signs that the market is not functioning efficiently.
Abstract: Banks and financial intermediaries that originate loans often sell some of these loans or securitize them in secondary loan markets and hold on to others. New issuances in such secondary markets collapse abruptly on occasion, typically when collateral values used to secure the underlying loans fall. These collapses are viewed by policymakers as signs that the market is not functioning efficiently. In this paper, we develop a dynamic adverse selection model in which small reductions in collateral values can generate abrupt inefficient collapses in new issuances in the secondary loan market. In our model, reductions in collateral values worsen the adverse selection problem and induce some potential sellers to hold on to their loans. Reputational incentives induce a large fraction of potential sellers to hold on to their loans rather than sell them in the secondary market. We find that a variety of policies that have been proposed during the recent crisis to remedy market inefficiencies do not help resolve the adverse selection problem.

36 citations

Journal ArticleDOI
TL;DR: In this paper, an exchange rate policy which is less than 100% backed and dynamically adjusts in response to traders' conversion demand eliminates speculative attacks while, under some conditions, preserving much of the desired exchange rate stability.

35 citations

Posted Content
TL;DR: This paper examined the role of financial markets in reallocating funds from cash-rich, low productivity firms to cash-poor, high productivity firms and found that disturbances in financial markets are a promising source of business cycle fluctuations when non-financial linkages across firms are sufficiently strong.
Abstract: We examine the quantitative importance of financial market shocks in accounting for business cycle fluctuations. We emphasize the role financial markets play in reallocating funds from cash-rich, low productivity firms to cash-poor, high productivity firms. Using evidence on financial flows at the firm level, we find that for publicly traded firms (in Compustat), almost all investment is financed internally. However, using an alternative data source (Amadeus), we find that most investment by privately held firms is financed via external funds. Motivated by these observations, we build a quantitative model featuring publicly and privately held firms that face collateral constraints and idiosyncratic risk over productivity as well as non-financial linkages. In our calibrated model, we find that a shock to the collateral constraints which generates a one standard deviation decline in the debt-to-asset ratio leads to a 0.5% decline in aggregate output on impact, roughly comparable to the effect of a one standard deviation shock to aggregate productivity in a standard real business cycle model. In this sense, we find that disturbances in financial markets are a promising source of business cycle fluctuations when non-financial linkages across firms are sufficiently strong.

29 citations


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TL;DR: In this article, the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders is examined and the authors suggest a role for government as the lender of last resort.
Abstract: This paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders. It illustrates that (1)the allocation of credit is inefficient and at times can be improved by government intervention, and (2) small changes in the exogenous risk-free interest rate can cause large (discontinuous) changes in the allocation of credit and the efficiency of the market equilibrium. These conclusions suggests a role for government as the lender of last resort.

373 citations

Posted Content
TL;DR: The authors examine a market in which long-lived firms face a short-term incentive to exert low effort, but could earn higher profits if they were able to commit to high effort, and show that competent firms choose high effort in an attempt to distinguish themselves from inept firms.
Abstract: We examine a market in which long-lived firms face a short-term incentive to exert low effort, but could earn higher profits if it were possible to commit to high effort. There are two types of firms, "inept" firms who can only exert low effort, and "competent" firms who have a choice between high and low effort. There is occasional exit, and competent and inept potential entrants compete for the right to inherit the departing firm's reputation. Consumers receive noisy signals of effort choice, and so competent firms choose high effort in an attempt to distinguish themselves from inept firms. A competent firm is most likely to enter the market by purchasing an average reputation, in the hopes of building it into a good reputation, than either a very low reputation or a very high reputation. Inept firms, in contrast, find it more profitable to either buy high reputations and deplete them or buy low reputations.

308 citations

ReportDOI
TL;DR: It is established that the risk-return tradeoff of cryptocurrencies (Bitcoin, Ripple, and Ethereum) is distinct from those of stocks, currencies, and precious metals and that proxies for investor attention strongly forecast cryptocurrency returns.
Abstract: We establish that cryptocurrency returns are driven and can be predicted by factors that are specific to cryptocurrency markets. Cryptocurrency returns are exposed to cryptocurrency network factors but not cryptocurrency production factors. We construct the network factors to capture the user adoption of cryptocurrencies and the production factors to proxy for the costs of cryptocurrency production. Moreover, there is a strong time-series momentum effect, and proxies for investor attention strongly forecast future cryptocurrency returns.

275 citations

Journal ArticleDOI
TL;DR: In this article, the authors provide a first analysis of market jumpstarting and its two-way interaction between mechanism design and participation constraints, and characterize the optimal intervention, and draw two main implications.
Abstract: As illustrated by liquidity support, equity injections and asset repurchases in financial crises and by IMF credit lines to countries, authorities often intervene in orderto revive markets that have dried up or to create newones. In suchsituations, agents participate only if they receive from the governmental scheme more than in the marketplace, while the market outcome depends on who joins the scheme. The paper provides a first analysis of market jumpstarting and its two-way interaction between mechanism design and participation constraints. In the model, sellers in need of cash have private information about the value of their legacy asset. The absence of buyer confidence forces authorities to intervene to jump-start the market. We characterize the optimal intervention, and draw two main implications. First, the government should clean up the market, through buybacks of the weakest assets and then through some equity injections, and leave the agents with the strongest legacy assets to the market. In particular, authorities should not substitute fully for the market, even when they have no comparative disadvantage in acquiring assets or shares thereof. Second, the government creates its own competition by cleaning up the market from its most toxic pieces. At the optimal intervention the government always strictly overpays for the legacy asset. Yet, and unlike what would be suggested by Coasian profit evasion, the existence of a later market imposes no welfare cost. While it is cast in a public intervention context, the analysis of mechanismdependent reservation utilities also admits important private sector applications.

250 citations

Journal ArticleDOI
TL;DR: In this paper, the authors develop a dynamic equilibrium model of asset markets with adverse selection, where sellers of high quality assets are willing to set a high price despite the low sale probability, while buyers of low quality assets opt for a low price.
Abstract: We develop a dynamic equilibrium model of asset markets with adverse selection. There exists a unique equilibrium in which better quality assets trade at higher prices but with a lower price-dividend ratio in less liquid markets. Sellers of high-quality assets signal quality by accepting a lower trading probability. We show how the distribution of sellers’ private information affects an asset’s price and liquidity, how a change in that distribution can cause a �耀re sale and a �耀ight to quality , and how asset purchase and subsidy programs may raise prices and liquidity and reverse the �耀ight to quality. (JEL D82, G12) This paper develops a dynamic equilibrium model of asset markets with adverse selection. The owners of heterogeneous assets are privately informed about the quality of their assets. Sellers set prices for their assets recognizing that sales may be rationed at high prices. Buyers set prices recognizing that the quality of available assets may depend on the price selected. In equilibrium, sellers of high quality assets are willing to set a high price despite the low sale probability because the continuation value from failing to sell a high quality asset is high; conversely, sellers of low quality assets opt for a low price. Buyers are indifferent between paying a low price for a low quality asset and a high price for a high quality asset. We prove these results in a deliberately stylized dynamic general equilibrium framework. Assets are perfectly durable and pay a constant dividend each period, some amount of a perfectly perishable consumption good. Better quality assets pay a higher dividend but only the asset’s current owner observes the dividend. This is the source of private information and the root of the adverse selection problem, as in Akerlof (1970). The only permissible trades are between the consumption good and the asset. Individuals are risk-neutral and have a discount factor that changes over time, independently across individuals, creating gains from trade. Finally, discount factors are observable, which ensures that patient individuals never sell assets since there are no gains from trade. We believe this framework is useful for capturing

203 citations