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Markets with Multidimensional Private Information

Author

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  • Robert Shimer

    (University of Chicago)

  • Veronica Guerrieri

    (University of Chicago)

Abstract

This paper explores the tension between risk sharing and risk taking linked to securitization. Financial development typically leads to an increase in securitization that helps financial institutions to share idyiosincratic risk. By increasing expected returns, risk sharing tends to reduce the incentive to pay monitoring costs and spurs a wave of easy lending. This generates an increase in credit access, but at the same time makes financial institutions more exposed to risk. As a result, small aggregate shocks may generate large financial crises.

Suggested Citation

  • Robert Shimer & Veronica Guerrieri, 2012. "Markets with Multidimensional Private Information," 2012 Meeting Papers 1192, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:1192
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    References listed on IDEAS

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    Cited by:

    1. Andrea Attar & Thomas Mariotti & François Salanié, 2021. "Entry-Proofness and Discriminatory Pricing under Adverse Selection," American Economic Review, American Economic Association, vol. 111(8), pages 2623-2659, August.
    2. Benjamin Lester & Guillaume Rocheteau & Pierre‐Olivier Weill, 2015. "Competing for Order Flow in OTC Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 77-126, June.
    3. Zhifeng Cai & Feng Dong, 2021. "A Model of Secular Migration from Centralized to Decentralized Trade," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 72(1), pages 201-244, July.
    4. Wang, Zijian, 2020. "Liquidity and private information in asset markets: To signal or not to signal," Journal of Economic Theory, Elsevier, vol. 190(C).
    5. Zachary Bethune & Bruno Sultanum & Nicholas Trachter, 2022. "An Information-based Theory of Financial Intermediation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(5), pages 2381-2444.
    6. Davoodalhosseini, Seyed Mohammadreza, 2022. "Optimal taxation in asset markets with adverse selection," European Economic Review, Elsevier, vol. 147(C).
    7. Daeyoung Jeong, 2019. "Job market signaling with imperfect competition among employers," International Journal of Game Theory, Springer;Game Theory Society, vol. 48(4), pages 1139-1167, December.
    8. Alex Edmans & William Mann, 2019. "Financing Through Asset Sales," Management Science, INFORMS, vol. 65(7), pages 3043-3060, July.
    9. Merrill, Craig B. & Nadauld, Taylor D. & Stulz, René M. & Sherlun, Shane M., 2021. "Were there fire sales in the RMBS market?," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 17-37.
    10. Pierre-Olivier Weill, 2020. "The search theory of OTC markets," NBER Working Papers 27354, National Bureau of Economic Research, Inc.
    11. Paulina Restrepo-Echavarria & Antonella Tutino & Anton Cheremukhin, 2013. "A Theory of Targeted Search," 2013 Meeting Papers 664, Society for Economic Dynamics.
    12. Gabrovski, Miroslav & Kospentaris, Ioannis, 2021. "Intermediation in over-the-counter markets with price transparency," Journal of Economic Theory, Elsevier, vol. 198(C).
    13. Wang, Zijian, 2019. "Trading Motives in Asset Markets," MPRA Paper 91401, University Library of Munich, Germany.
    14. Ronald Wolthoff, 2018. "Applications and Interviews: Firms’ Recruiting Decisions in a Frictional Labour Market," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(2), pages 1314-1351.
    15. Ordoñez, Guillermo & Perez-Reyna, David & Yogo, Motohiro, 2019. "Leverage dynamics and credit quality," Journal of Economic Theory, Elsevier, vol. 183(C), pages 183-212.
    16. Matt Darst & Ehraz Refayet, 2019. "Mixed Signals: Investment Distortions with Adverse Selection," Finance and Economics Discussion Series 2019-044, Board of Governors of the Federal Reserve System (U.S.).
    17. James B. Davies & Samantha L. Black, 2020. "Distributional Effects of Flooding, with an Application to a Major Urban Area," University of Western Ontario, Departmental Research Report Series 20201, University of Western Ontario, Department of Economics.
    18. Zijian Wang, 2019. "Trading Motives in Asset Markets," University of Western Ontario, Departmental Research Report Series 20191, University of Western Ontario, Department of Economics.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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