Research
Working Papers
Abstract:
This paper investigates the underlying causes of heterogeneity in both the timing and quality of buyers’ replacement of durable goods, and examines how interest rates influence the trading decisions of buyers and sellers. I develop a model of differentiated durable goods that incorporates search frictions and failure rates. The interaction between these factors leads ex ante homogeneous buyers and sellers to sort themselves into submarkets characterized by heterogeneous prices and expected residual lifespans of products. I demonstrate that a unique equilibrium exists in this setting. The model reveals that buyers’ optimal replacement decisions are monotonic in quality, partitioning the state space into two non-degenerate regions of action and inaction, thus generalizing common frameworks in the durable goods literature. Furthermore, I show that a decrease in interest rates enhances product quality and increases the fraction of buyers in the inaction region.
Abstract:
We develop a model of asset issuance into an asset market with search frictions and asymmetric information. A monopolistic underwriter screens entrepreneurs' projects and sorts them into different markets characterized by heterogeneous levels of trading frictions. Indirectly, the underwriter affects liquidity (spreads) in the OTC market, where investors with complete information and dealers with asymmetric information interact. We show that a separating contract helps reduce the spreads, as compared to a pooling contract. The model can partially explain why different tiers, with different liquidity levels, are offered to firms of different quality.