Tepper School of Business
Carnegie Mellon University
5000 Forbes Avenue
Pittsburgh, PA 15213
NBER Working Papers and Publications
|December 2015||Screening and Adverse Selection in Frictional Markets|
with Benjamin Lester, Ali Shourideh, Venky Venkateswaran: w21833
We incorporate a search-theoretic model of imperfect competition into an otherwise standard model of asymmetric information with unrestricted contracts. We develop a methodology that allows for a sharp analytical characterization of the unique equilibrium, and then use this characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show how the structure of equilibrium contracts—and hence the relationship between an agent’s type, the quantity he trades, and the corresponding price—is jointly determined by the severity of adverse selection and the concentration of market power. This suggests that quantifying the effects of adverse selection requires controlling for the market structure. We also show that increasing competition and reducin...
|June 2010||Adverse Selection, Reputation and Sudden Collapses in Secondary Loan Markets|
with V.V. Chari, Ali Shourideh: w16080
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 potentia...