Information, Markets, and the Macroeconomy

Project Information

INFOMAK

Grant agreement ID: 948432

DOI

10.3030/948432

Project closed

EC signature date 5 October 2020

Start date 1 January 2021

End date 31 December 2025

Funded under

• EXCELLENT SCIENCE - European Research Council (ERC)

Total cost

€ 767 500,00

EU contribution

€ 767 500,00

Coordinated by

Centre de Recerca en Economia Internacional (CREI)
Spain

Periodic Reporting for period 4 - INFOMAK (Information, Markets, and the Macroeconomy)

Reporting period: 2025-07-01 to 2025-12-31

Summary of the context and overall objectives of the project

Financial markets play an essential role in allocating an economy’s resources to their most productive use, fostering investment, employment, innovation, and growth. There is substantial evidence, however, that the presence of frictions that prevent the sound functioning of financial markets can expose economies to large fluctuations and hinder long-term growth. A large literature in microfinance explores the interaction between financial market frictions and macroeconomic fluctuations. The state-of-the-art approach, however, has essentially taken a reduced form approach to credit market frictions by assuming that agents cannot promise all future cash flows from their projects to investors; that is, pledgeability is limited. As the recent financial crisis showed, however, financial markets have problems that go beyond limited pledgeability. Informational problems proved significant, both because many of the assets that were central to the crisis were difficult to understand or because they were prone to severe issues of asymmetric information that surfaced once the crisis hit.

Information problems, of course, have been widely studied in economics. There is a large literature that focuses on how markets function, or may fail to do so, in the presence of information asymmetries among market participants. Much of this literature, however, studies informational problems by taking the quality and the complexity of assets as given, with models often cast in static, partial equilibrium settings.

Motivated by this, the objective of this proposal is two-fold. In Part I, the PI plans to develop novel microeconomic frameworks to study how information asymmetries are affected by agents’ actions, such as choosing to design complex assets or to trade in opaque markets.

Furthermore, the PI will complement these findings with an empirical analysis of the determinants of financial asset complexity in the data. In Part II, the PI will embed these newly developed micro frameworks into dynamic, general equilibrium, macro settings to study how information asymmetries, and resulting incentives to invest and trade in markets, fluctuate over the cycle and across economies.

Work performed from the beginning of the project to the end of the period covered by the report and main results achieved so far

Since its launch in 2021, the ERC project Information, Markets, and the Macroeconomy (INFOMAK) has developed a unified research program studying how informational frictions shape financial frictions, contract design, investment, and macroeconomic dynamics. The project was structured around two complementary objectives: (i) microeconomic foundations of information and credit frictions, and (ii) macroeconomic implications for financial frictions, investment, and aggregate activity.

Under the first objective, the project delivered three major publications and a working paper:

• Security Design in Non-Exclusive Markets with Asymmetric Information (Review of Economic Studies, 2023), joint with V. Asriyan, extends classical exclusive-contract paradigms to non-exclusive trading environments and characterizes equilibrium security structures under asymmetric information (Project 2).

• Designing Securities for Scrutiny (Review of Financial Studies, 2023), joint with B. Daley and B. Green, shows how public information and regulatory oversight affect security design, price informativeness, and firms’ access to finance (Project 2).

• The Good, the Bad, and the Complex (AEJ: Microeconomics, 2023) proposes a novel notion of product complexity and a tractable framework showing how informational frictions generate endogenous complexity (Project 1).

• A New Theory of Credit Lines (with Evidence), joint with J. R. Donaldson, N. Koont, and G. Piacentino, studies non-exclusive credit markets and mechanisms to improve access to finance. It shows that credit lines deter future debt dilution and confronts the model with data on loan bundling and usage. The paper received the WRDS Best Paper Award at the 3rd Holden Conference (Project 2).

These contributions provide new theoretical foundations for understanding opacity, liquidity, financial innovation, and the allocation of resources.

The project also advanced its macro-financial component. In Banks vs. Firms: Who Benefits from Credit Guarantees? (with A. Martín and S. Mayordomo), the authors analyze the distributional and incentive effects of large-scale public credit guarantees implemented during COVID in the presence of debt overhang. This paper emerged in response to the pandemic and received the Armen Alchian Best Paper Award (2024).

Most recently, the project consolidated its micro and macro pillars through a new general equilibrium framework linking asset properties to borrowing capacity. It shows that borrowing constraints depend not only on liquidation values but also on continuation values and technology choice. This framework provides foundations to study the financing of intangible capital and innovation and opens a new research agenda beyond the original proposal.

Dissemination has been extensive. ERC-funded research was presented at leading universities, central banks, and conferences in Europe and North America, including Yale, University of Pennsylvania, London Business School, Banque de France, the ECB, FIRS, CEPR, and the EEA. The PI organized workshops under the BSE Summer Forum (2020–2024), the MADBAR Banking Conference (2024), and the Finance Theory Group Summer Meeting (2024).

The ERC grant enabled the recruitment and training of research assistants and PhD students, the consolidation of international collaborations, and the development of a sustained research group at CREI.

Progress beyond the state of the art and expected potential impact (including the socio-economic impact and the wider societal implications of the project so far)

INFOMAK advances the state of the art along three main dimensions.
First, it extends classical models of security design by introducing non-exclusive contracting under asymmetric information. This departs from standard exclusive-contract environments and provides new foundations to analyze opaque credit markets.
Second, it develops a formal theory of endogenous product complexity, clarifying how informational frictions generate contract structures that may reduce transparency even when complexity is socially costly.
Third, and most recently, the macro-finance project challenges the traditional view that borrowing constraints are determined exclusively by liquidation values. By incorporating asset specificity and continuation values into a general equilibrium framework, the project shows how technology choice, asset prices, and borrowing capacity interact dynamically. This approach opens a new research direction on the financing of intangible capital and innovation, particularly relevant for advanced economies.
While the formal ERC period concludes in 2025, ongoing work on asset specificity, credit lines, and safe assets builds directly on the theoretical foundations developed under INFOMAK. These projects are expected to generate further high-impact publications and deepen the macro-financial dimension of the research program.

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