Asymmetric information and limited commitment in financial markets: macroeconomic effects and policy implications

ABSTRACT:

The main goal of the project is to study the impact of financial frictions on economic performance, with a special focus on asymmetric information and limited commitment. We believe that these issues play a decisive role if we want to understand business cycles, the allocation of risk and resources across households and the right fiscal and monetary policies that should be implemented to improve social welfare. In particular, we pay special attention to the following issues. The consequences of limited commitment and enforcement, informational asymmetries, contract incompleteness and non-exclusivity, for the functioning of markets and policies. The role of credit rating agencies in producing public information when they have diverging interests from that of the public or of their clients. The macroeconomic implications of income and wealth distribution with incomplete markets and limited insurance. The optimal maturity of debt instruments based on default incentives. The possible benefits from capital taxation due to asymmetric information and lack of full observability of trades. The role of collateral for the stability of market outcomes and the impact of credit market frictions on firms ' entry and the induced market structure. In terms of tools and methodologies, some of the participants in the project will focus on the theoretical foundations of financial frictions. Some other will be mostly concerned with the development of new analytical tools for the analysis of heterogeneous agent models (mapping aggregate outcomes from micro behavior), which become particularly important in economies with limited insurance and idiosyncratic shocks.

PI: Pietro Reichlin, Luiss Libera Università internazionale degli studi sociali Guido Carli

Other Research Units: 

• Piero Gottardi, Università "Ca' Foscari" Venezia
• Andrea Kamal Attar, Università degli Studi di Roma "Tor Vergata"