Excessive concentration of aggregate risk can lead to financial fragility and balance sheet recessions, and may create the need for financial regulation. This paper studies the optimal financial regulation scheme, with a focus on the optimal allocation of aggregate risk. I use a standard growth...

This paper proposes a theory of liquidity dynamics. Illiquidity results from asymmetric information. Observing the historical track record teaches agents how to interpret public information and helps overcome information asymmetry. There can be an illiquidity trap: too much asymmetric...

When faced with a speculative attack, banks and governments often hesitate, attempting to withstand the attack but giving up after some time, suggesting they have some ex-ante uncertainty about the attack they will face. I model that uncertainty as arising from incomplete information about...

In October 2009, the house financial services committee voted to study the effects of removing ratings requirements for credit products. Eliminating such requirements would allow the issuers of credit products to decide whether or not to pay a ratings agency to rate their asset. If such a rating...

We study equilibrium outcomes in markets with asymmetric information about asset values among both buyers and sellers. In residential real estate markets hard-to-observe neighborhood characteristics are a key source of information heterogeneity: sellers are usually better informed about...

I study a model of trading where publicly available information about assets has an unknown joint distribution with the quality of the underlying asset. Efficiency losses are a function of how well traders know this joint distribution, which can vary endogenous are traders learn from past trades.

I study a model of trading under asymmetric information where traders may invest in the acquisition of skills that give them an informational advantage. I characterize conditions under which experts enhance of detract from market liquidity and study the socially efficient level of acquisition of...

I study a dynamic economy featuring adverse selection in asset markets. Borrowing-constrained entrepreneurs sell past projects to finance new investment, but asymmetric information creates a lemons problem. I show that this friction is equivalent to a tax on financial transactions. The implicit...