https://macropaperwarehouse.com/authors/juan-herreno/Juan HerreñoHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/illiquid-lemon-markets-and-the-macroeconomy/https://macropaperwarehouse.com/papers/illiquid-lemon-markets-and-the-macroeconomy/<p>The paper develops a quantitative capital-accumulation model in which capital trades in illiquid markets with asymmetric information — sellers know the quality of their capital but buyers do not. It combines this model with microdata on nonresidential capital units listed for trade to measure the degree of information asymmetry and quantify its macroeconomic effects.</p> <p><strong>Model</strong>: The economy features heterogeneous capital units characterized by observed quality ω (e.g., size, location, age — observable to both buyers and sellers) and unobserved quality a (known only to the seller). Capital trades in directed-search markets: sellers post a price and a target submarket; buyers direct their search; a matching function determines trade probabilities. Buyers observe announced quality and have an inspection technology that reveals true quality with probability ψ (&ldquo;lemon detection probability&rdquo;); with probability 1−ψ a low-quality unit goes undetected. In equilibrium, sellers of high-quality capital signal their type by listing at higher prices and accepting lower trading probabilities (the Guerrieri-Shimer-Wright 2010 competitive search separating equilibrium, adapted to the capital accumulation setting). The key model prediction is that the residual price — the component of a listed price orthogonal to observed characteristics — is positively correlated with duration on the market, with the slope increasing as the degree of asymmetric information (1−ψ) rises.</p>