Payments and liquidity under adverse selection |
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Authors: | Guillaume Rocheteau |
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Institution: | a University of California, Irvine, United States b Federal Reserve Bank of Cleveland, United States |
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Abstract: | Informational asymmetries regarding the future value of assets affect their role in exchange. I construct a random-matching economy composed of two assets: a risk-free bond and a Lucas tree whose terminal value is privately known to its holder. No restrictions are imposed on payment arrangements. The main finding supports a pecking-order theory of payments: Agents use their risk-free bonds first in order to finance their spending shocks, and they use their information-sensitive assets only if their holdings of bonds are depleted. The theory has implications for the optimal provision of risk-free bonds, the structure of asset returns, and liquidity. |
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