Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality

Veronica Guerrieri, Robert Shimer

NBER Working Paper No. 17876
Issued in March 2012

---- Acknowledgements -----

This paper is an outgrowth of research with Randall Wright; we are grateful to him for many discussions and insights on this project. A previous version of this paper was entitled, "Competitive Equilibrium in Asset Markets with Adverse Selection.'' We also thank numerous seminar audiences for comments on previous versions of this paper. For research support, Guerrieri is grateful to the Alfred P. Sloan Foundation, Shimer is grateful to the National Science Foundation. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

---- Disclosure of Financial Relationships for Robert Shimer -----

I have received material compensation from the following institutions during the last three years: Aarhus University, Banco Central de Chile, Barcelona Graduate School of Economics, the Federal Reserve Banks of Atlanta, Chicago, and Minneapolis, Queens University, and the Sloan Foundation, as well as the National Science Foundation and the University of Chicago.

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