Electronic Thesis and Dissertation Repository

Thesis Format

Integrated Article

Degree

Doctor of Philosophy

Program

Economics

Supervisor

Williamson, Stephen D.

Abstract

In our economy, many interactions between individuals involve one party possessing more or better information than the other party (i.e., private information). For example, in asset markets, sellers often have better knowledge about the quality of the assets than buyers. Private information also exists when governments collect taxes, because taxpayers typically have more information about their income compared to the government. In my thesis, I explore the implications of private information in three novel contexts.

In Chapter 2, I study the implications of tax evasion for the design of central bank digital currency, which is an emerging payment instrument. I build a general equilibrium framework to explicitly allow tax evasion by agents and tax audits by a government. I find that introducing a deposit-like CBDC can increase welfare and reduce tax evasion. Furthermore, a deposit-like CBDC needs not increase the funding costs of private banks or decrease bank lending and investment. However, paying a high interest rate on CBDC will decrease the central bank's net interest revenue, which may jeopardize central bank independence.

Chapter 3 examines how multi-dimensional private information affects asset market equilibrium. I find that when asset quality is the only source of private information, sellers with high-quality assets signal their quality to buyers through partial retention of assets if and only if their liquidity holdings are large. However, when sellers' valuations of liquid assets are also private information, some sellers with high-quality assets signal their quality even if their liquidity holdings are small. I extend the model to study of the implications for discount window lending and government asset purchases.

Chapter 4 contains a study of illiquidity and partial retention of assets as signals of asset quality in markets with private information. I find that both signals are used in equilibrium. However, sellers with high-quality assets prefer illiquidity over partial retention in the sense that among these sellers, those with higher-quality assets sell marginally fewer assets but with significantly lower probability. In comparison, sellers with low-quality assets prefer partial retention over illiquidity in the sense that among these sellers, those with higher-quality assets sell significantly fewer assets but with only marginally lower probability.

Summary for Lay Audience

People face information disadvantages and advantages in everyday life. For example, when buying a used car, one recognizes that there is typically hidden information (i.e., private information) about the quality of the car. In contrast, when filing tax returns, taxpayers usually have more information about their income compared to the government. There is a large literature that studies private information in various contexts, and my thesis contributes to this literature by investigating how private information affects monetary policy and asset pricing.

Chapter 2 of my thesis studies the implications of tax evasion for the design of central bank digital currency, which is a digital form of central bank money and an emerging payment instrument. I find that introducing a deposit-like CBDC can increase welfare and reduce tax evasion. Furthermore, competition from a deposit-like CBDC needs not increase the deposit rate and reduce bank lending. However, paying a high interest rate on CBDC will increase the expense of the central bank and may jeopardize its independence.

Chapter 3 examines how asset markets are affected by two types of private information that may coexist in markets. The first type of private information considered is asset quality, while the second type is how much sellers value liquid assets. I find that asset prices and the quantities of assets for sale depend not only on how much liquid assets sellers need but also on what private information is present in the market. Building on the findings, I study the monetary and fiscal policies during financial crises.

Chapter 4 studies two types of signals of asset quality that are often observed empirically in asset markets, i.e., signaling via illiquidity (that is sellers with high-quality assets sell with a lower probability) and signaling via partial retention (that is sellers with high-quality assets sell a smaller quantity). I find that, for sellers with high-quality assets, illiquidity is preferred over partial retention, while the opposite is true for sellers with low-quality assets. Building on these results, I study aggregate liquidity and quality shocks that often happen during financial crises.

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