Benjamin Lester

• Federal Reserve Bank Of Philadelphia

We study a canonical model of decentralized exchange for a durable good or asset, where agents are assumed to have time‐varying, heterogeneous utility types. Whereas the existing literature has focused on the special case of two types, we allow agents' utility to be drawn from an arbitrary distribution. Our main contribution is methodological: we p...

We study liquidity conditions in the corporate bond market during the COVID-19 pandemic. We document that the cost of trading immediately via risky-principal trades dramatically increased at the height of the sell-off, forcing customers to shift toward slower agency trades. Exploiting eligibility requirements, we show that the Federal Reserve’s cor...

We extend Duffie et al.’s (2005) search-theoretic model of over-the-counter (OTC) asset markets, allowing for a decentralized inter-dealer market with arbitrary heterogeneity in dealers’ valuations (or, equivalently, inventory costs). We develop a solution technique that makes the model fully tractable and allows us to derive, in closed form, theor...

The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves, and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Re...

We incorporate a search-theoretic model of imperfect competition into a standard model of asymmetric information with unrestricted contracts. We characterize the unique equilibrium and use our characterization to explore the interaction between adverse selection, screening, and imperfect competition. We show that the relationship between an agent’s...

In many markets, sellers advertise their good with an asking price. This is a price at which the seller will take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. We construct an environment with...

In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementa...

We study government interventions in markets suffering from adverse selection. Importantly, asymmetric information prevents both the realization of gains from trade and the production of information that is valuable to other market participants. We find a fundamental tension in maximizing welfare: while some intervention is required to restore trad...

We develop a tractable framework for analyzing adverse selection economies with imperfect competition. Applications include markets for insurance, loans and financial assets. In our environment, uninformed buyers offer a general menu of screening contracts to trade with a privately informed seller. Imperfect competition is captured by allowing some...

n a market in which sellers compete by posting mechanisms, we study how the properties of the meeting technology affect the mechanism that sellers select. In general, sellers have incentive to use mechanisms that are socially efficient. In our environment, sellers achieve this by posting an auction with a reserve price equal to their own valuation,...

In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementa...

We study a search and bargaining model of an asset market, where investors’ heterogeneous valuations for the asset are drawn from an arbitrary distribution. Our solution technique renders the analysis fully tractable and allows us to provide a full characterization of the equilibrium, in closed-form, both in and out of steady-state. We use this cha...

In a market in which sellers compete by posting mechanisms, we study how the properties of the meeting technology affect the mechanism that sellers select. In general, sellers have incentive to use mechanisms that are socially efficient. In our environment, sellers achieve this by posting an auction with a reserve price equal to their own valuation...

We develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades—which can include prices, quantities, and execution speed—and investors direct their orders toward dealers who offer the most attractive terms. We char...

When markets freeze, not only are gains from trade left unrealized, but the process of information production through prices, or price discovery, is disrupted as well. Though this latter effect has received much less attention than the former, it constitutes an important source of inefficiency during times of crisis. We provide a formal model of pr...

In many markets, sellers advertise their good with an asking price. This is a price at which the seller is willing to take his good off the market and trade immediately, though it is understood that a buyer can submit an offer below the asking price and that this offer may be accepted if the seller receives no better offers. Despite their prevalenc...

What determines which assets are used in transactions? We develop a framework where the extent to which assets are recognizable determines the extent to which they are acceptable in exchange—i.e. it determines their liquidity. Recognizability and liquidity are endogenized by allowing agents to invest in information. We analyse the effects of moneta...

We study how recognizability affects assets' acceptability, or liquidity. Some assets, like U.S. currency, are readily accepted because sellers can easily recognize their value, unlike stock certificates, bonds or foreign currency, say. This idea is common in monetary economics, but previous models deliver equilibria where less recognizable assets...

The authors study a dynamic, decentralized lemons market with one-time entry and characterize its set of non-stationary equilibrium. This framework offers a theory of how a market suffering from adverse selection recovers over time endogenously; given an initial fraction of lemons, the model provides sharp predictions about how prices and the compo...

In the theoretical literature on consumer search, one conclusion is nearly universal: as buyers become better able to observe and compare prices ex ante, sellers will set lower prices in equilibrium. In this paper, I examine a standard consumer search model with one small -- yet often relevant -- additional restriction: I assume that sellers are ca...

What determines which assets are used in transactions? We develop a framework where the extent to which assets are recognizable determines the extent to which they are acceptable in exchange - i.e., their liquidity. We analyze the effects of monetary policy on asset markets. Recognizability and liquidity are endogenized by allowing agents to invest...

I construct a directed search model in which firms decide whether to enter a market and how many positions to create. Within this framework, the number of firms and the size of each firm are determined endogenously, wages play an allocative role in the matching process, and the frictions inherent in this process derive from the equilibrium behavior...

A peculiar principle of legal evidence in common law systems is that probative evidence may be excluded in order to increase the accuracy of fact-finding. A formal model is provided that rationalizes this principle. The key assumption is that the fact-finders (jurors) have a cognitive cost of processing evidence. Within this framework, the judge ex...

We construct a general equilibrium model in which credit is used as a medium of exchange, and banks participate in a settlement system to finalize their customers' transactions. We study the optimal settlement system design, and find that a trade-off arises endogenously within the model. A higher frequency of settlement and more costly intra-day bo...

We study economies with multiple assets that are valued both for their return and liquidity. Exchange occurs in decentralized markets with frictions making a medium of exchange essential. Some assets are better suited for this role because they are more liquid - more likely to be accepted in trade - even if they have a lower return. The reason asse...

in response to shocks of any magnitude.

A settlement system is a set of rules and procedures that govern when and how funds are transferred between banks. Perhaps the most crucial feature of a settlement system is the frequency with which settlement occurs. On the one hand, a higher frequency of settlement limits the risk of default should a bank be rendered insolvent. On the other hand,...

This dissertation is composed of three essays. In the first essay, a framework is developed to assess alternative settlement system designs. I illustrate that more frequent settlement and more costly intra-day liquidity limit the risk of default should a bank be rendered insolvent. However, such policies impose greater costs on both the settlement...

The theoretical literature on price transparency predicts that an increase in the ability of buyers to compare prices ex-ante should be accompanied by a decrease in those prices set by sellers. Empirical support for this strong prediction is decidedly mixed. An underly- ing assumption in the existing literature is that a buyer can always purchase a...

This paper studies a decentralized market economy with two frictions: some buyers are im- perfectly informed ex-ante about sellers' prices and sellers are capacity-constrained. Though these frictions co-exist in many markets, they have primarily been studied in isolation. How- ever, an interesting interaction emerges when the two are considered joi...

This paper studies the effect of screening costs on the equilibrium allocation of work-ers with different productivities to firms with different technologies. In the model, a worker's type is private information, but can be learned by the firm during a costly screening or interviewing process. We characterize the planner's problem in this en-vironm...