This dissertation studies three different dynamic environments and trade-offs that arise from the dynamic structure of the problem.

The first chapter considers a dynamic pricing problem. The Internet allows sellers to track "window shoppers," consumers who look but do not buy, and to lure them back later by targeting them with an advertised sale. This new technology thus facilitates intertemporal

price discrimination, but simultaneously makes it too easy for a seller to undercut her regular price. Because buyers know they could be lured back, the seller is forced to set a lower regular price. Advertising costs can, therefore, serve as a form of commitment: a seller can actually benefit from higher costs of advertising. Based on this framework, the impact of advertising costs on prices, prots, and welfare are analyzed using a dynamic pricing model. Furthermore, it is demonstrated how buyers' time preferences give rise to price fluctuation or an everyday-low-price in equilibrium.

The second chapter originates from a joint work with William Fuchs and Andrzej Skrypacz. We analyze a dynamic market with adverse selection and correlated values. Uninformed buyers compete inter- and intra-temporarily for a good that is sold by an informed seller who is suffering a liquidity shock. We contrast a transparent (public price offers) with an opaque (private price offers) information structure. For infrequent trading, all equilibria with private offers are in pure strategies and coincide with equilibria with public offers. If the frequency of trade exceeds a certain threshold, then pure strategy equilibria cannot be sustained with private offers. We characterize the set of mixed-strategy equilibria with private offers if the seller has two opportunities to trade before the deadline and show that any equilibrium with private offers Pareto-dominates the unique pure strategy equilibrium with public offers. We provide a strong intuition for why these results extend to more general settings.

The third chapter is based on joint work with Michèle M�üller-Itten and it is concerned with dynamic affirmative action policies. We provide a dynamic overlapping generations framework to analyze the costs and benefits of affirmative action policies if mentoring complementarities are present. The old population boosts the young population's productivity through mentoring, assuming the mentoring boost is increasing in the fraction of mentors from the same group. In such a framework, the main trade-off is between using the most able workers and making the optimal use of the mentoring complementaries. A balanced labor force is always a steady state. We establish conditions under which this steady state is welfare optimal and stable. Affirmative action is more likely to be welfare-enhancing in markets with an under-supply of workers because it can increase the total labor force. This effect is the largest with a subsidy in favor of minority workers because no majority workers will be crowded out. We also establish conditions under which drastic affirmative action policies should be implemented initially and terminated after one period. Finally, we present some simulations of the effect of different policies for a continuous time version of the model.

The research presented in this dissertation has been motivated by the Great Recession that has shown us once again how the financial system can amplify and propagate relatively mild economic shocks into larger scale recessions. In the past decade, we witnessed what many may call the worst crisis since the Great Depression that appears to have resulted from a perverse interaction between real estate markets and borrowers' balance sheets. The three chapters of this dissertation are an attempt to shed light on the mechanisms that may have allowed for such perverse effects to arise. I believe that to understand crisis episodes such as the recent one, it is imperative to study why some economic agents become overly exposed to risk, why financial markets fail to function at times, and what policy makers can do to ameliorate the incidence and repercussions of such adverse events.

In Chapter 1, "A Theory of Balance Sheet Recessions with Informational and Trading Frictions," I propose a novel theory to rationalize the limited risk-sharing that drives balance sheet recessions as a result of informational and trading frictions in financial markets. I show that borrowers and creditors will find it costly to share macroeconomic risk in environments where creditors value the liquidity of financial claims but where information about the future states of the economy is dispersed and the secondary markets for financial claims feature search frictions. As a result, borrowers will optimally choose to retain disproportionate exposures to macroeconomic risk on their balance sheets, and adverse shocks will be amplified through the balance sheet channel. I show that the magnitude of this amplification becomes closely linked to the level of information dispersion and the severity of search frictions in financial markets. In this setting, I study the implications of the theory for macro-prudential regulation and find that subsidizing contingent write-downs of borrowers' liabilities can be welfare improving.

In Chapter 2, "Informed Intermediation over the Cycle," a joint work with Victoria Vanasco, we construct a dynamic model of financial intermediation in which changes in the information held by financial intermediaries generate asymmetric credit cycles as the ones documented by Reinhart and Reinhart (2010). We model financial intermediaries as "expert'' agents who have a unique ability to acquire information about firm fundamentals. While the level of "expertise'' in the economy grows in tandem with information that the "experts'' possess, the gains from intermediation are hindered by informational asymmetries. We find the optimal financial contracts and show that the economy inherits not only the dynamic nature of information flow, but also the interaction of information with the contractual setting. We introduce a cyclical component to information by supposing that the fundamentals about which experts acquire information are stochastic. While persistence of fundamentals is essential for information to be valuable, their randomness acts as an opposing force and diminishes the value of expert learning. Our setting then features economic fluctuations due to waves of "confidence'' in the intermediaries' ability to allocate funds profitably.

In Chapter 3, "Credit Crises, Liquidity Traps, and Demand Externalities," I extend the work of Eggertsson and Krugman (2012) to study welfare implications of households' consumption-saving decisions in New Keynesian economies with incomplete asset markets. My contribution is to show that due to aggregate demand externalities the amount of debt pre-contracted in such economies is generally excessive, and that the amount of "over-borrowing" is increasing in the Central Banker's inflation-aversion. This externality arises because an individual household does not internalize its contribution to the overall fragility as the latter is only a function of aggregate indebtedness of all borrowers. These findings suggest that macro-prudential policies geared towards limiting household leverage can indeed be welfare improving.

This dissertation consists of three chapters that concern technology adoption and corporate finance. The first chapter analyzes the optimal investment strategy of two firms confronted with the option to adopt a new technology. The second chapter analyzes the link between debt maturity and term spread. The third chapter analyzes the role of debt financing on skyscraper heights.

The stability of national and, increasingly more often, the global economy relies on well-functioning financial markets. Households' consumption and saving decisions, firms' investment choices, and governments' financing strategies critically depend on the stability of financial markets. These markets, however, are composed of individuals and institutions that may have different objectives, information sets, and beliefs, making them a very complex object that we do not fully comprehend. Motivated by this, my dissertation focuses on understanding how informational asymmetries and belief heterogeneity impact financial markets, and therefore, the macro economy. More specifically, this dissertation explores the sources of informational asymmetries among market participants. How do different financial market structures provide incentives for private information acquisition? Is information acquisition desirable? What types of policies can be implemented to increase liquidity and "discipline" in financial markets? Could business cycles be related to information or belief cycles? I tackle these questions from three separate angles. First, I study how alternative market designs bring forth different levels of private information generation, "market discipline," and liquidity. Second, I investigate how information sets of key market participants are determined. Finally, I focus on how information and belief fluctuations may affect key macroeconomic variables and economic fluctuations.

In Chapter 1, ``Information Acquisition vs. Liquidity in Financial Markets," I propose a parsimonious framework to study markets for asset-backed securities (ABS). These markets play an important role in providing lending capacity to the banking industry by allowing banks to sell the cashflows of their loans and thus recycle capital and reduce the riskiness of their portfolios. In the financial crash of 2008, however, in which certain ABS played a substantial role, we witnessed a collapse in the issuance of all ABS classes. Given the importance of these markets for the real economy, policy makers in the US and Europe have geared their efforts towards reviving them. A good framework to think about these markets is imperative when thinking about financial regulation. The contribution of this chapter is to propose a model that captures the two main problems that have been shown to be present in the practice of securitization. First, the increase in securitization has led to a decline in lending standards, suggesting that liquid markets for ABS reduce incentives to issue good quality loans. Second, securitizers have used private information about loan quality when choosing which loans to securitize, indicating that a problem of asymmetric information is present in ABS markets. A natural question then arises: how should ABS be designed to provide incentives to issue good quality loans and, at the same time, to preserve liquidity and trade in these markets?

To address this question, I propose a framework to study ABS where both incentives and liquidity issues are considered and linked through a loan issuer's information acquisition decision. Loan issuers acquire private information about potential borrowers, use this information to screen loans, and later design and sell securities backed by these loans when in need of funds. While information is beneficial ex-ante when used to screen loans, it becomes detrimental ex-post because it introduces a problem of adverse selection that hinders trade in ABS markets. The model matches key features of these markets, such as the issuance of senior and junior tranches, and it predicts that when gains from trade in ABS markets are `sufficiently' large, information acquisition and loan screening are inefficiently low. There are two channels that drive this inefficiency. First, when gains from trade are large, a loan issuer is tempted ex-post to sell a large portion of its cashflows and thus does not internalize that lower retention implements less information acquisition. Second, the presence of adverse selection in secondary markets creates informational rents for issuers holding low quality loans, reducing the value of loan screening. This suggests that incentives for loan screening not only depend on the portion of loans retained by issuers, but also on how the market prices the issued tranches. Turning to financial regulation, I characterize the optimal mechanism and show that it can be implemented with a simple tax scheme. The obtained results, therefore, contribute to the recent debate on how to regulate markets for ABS.

In Chapter 2, I present joint work with Matthew Botsch, ``Learning by Lending, Do Banks Learn?" where we investigate how banks form their information sets about the quality of their borrowers. There is a vast empirical and theoretical literature that points to the importance of borrower-lender relationships for firms' access to credit. In this chapter, we investigate one particular mechanism through which long-term relationships might improve access to credit. We hypothesize that while lending to a firm, a bank receives signals that allow it to learn and better understand the firm's fundamentals; and that this learning is private; that is, it is information that is not fully reflected in publicly-observable variables. We test this hypothesis using a dataset for 7,618 syndicated loans made between 1987 and 2003. We construct a variable that proxies for firm quality and is unobservable by the bank, so it cannot be priced when the firm enters our sample. We show that the loading on this factor in the pricing equation increases with relationship time, hinting that banks are able to learn about firm quality when they are in an established relationship with the firm. Our finding is robust to controlling for market-wide learning about firm fundamentals. This suggests that a significant portion of bank learning is private and is not shared by all market participants.

The results obtained in this study underpin one of the main assumptions of the model presented in Chapter 1: that banks have a special ability to privately acquire valuable information about potential borrowers. While the model is static, the data suggests that the process of lending and of information acquisition is a dynamic one. Consistent with this, the last chapter of this dissertation studies the macroeconomic implications of dynamic learning by financial intermediaries.

Chapter 3 presents joint work with Vladimir Asriyan titled ``Informed Intermediation over the Cycle." In this paper, we construct a dynamic model of financial intermediation in which changes in the information held by financial intermediaries generate asymmetric credit cycles as the one observed in the data. We model financial intermediaries as ''expert'' agents who have a unique ability to acquire information about firm fundamentals. While the level of ''expertise'' in the economy grows in tandem with information that the ''experts'' possess, the gains from intermediation are hindered by informational asymmetries. We find the optimal financial contracts and show that the economy inherits not only the dynamic nature of information flow, but also the interaction of information with the contractual setting. We introduce a cyclical component to information by supposing that the fundamentals about which experts acquire information are stochastic. While persistence of fundamentals is essential for information to be valuable, their randomness acts as an opposing force and diminishes the value of expert learning. Our setting then features economic fluctuations due to waves of ``confidence'' in the intermediaries' ability to allocate funds profitably.

This thesis studies dynamic markets with endogenous entry, where access hurdles are either an explicit feature of the market or an implicit result of productive externalities.

The first chapter concerns markets of influence, where formal gatekeepers are in charge of selecting and promoting the most promising ideas. I model this as a two-sided matching market between a continuum of experts and a finite number of gatekeepers under sequential directed search. Real-world examples include academic publishing, venture capitalism or political agenda setting. Uniqueness of the resulting equilibrium allows for clear-cut pre- dictions: First, sorting may fail in equilibrium. Second, gatekeepers may have an incentive to add artificial delay. Such red tape occurs in equilibrium – and only at the top – when the impact of two gatekeepers is very different. Third, artificial delay may improve equilib- rium sorting and thereby enhance welfare. Finally, the bottom gatekeeper may endogenously specialize on a quality-irrelevant attribute.

In other applications, there are no formal gatekeepers who regulate market access, yet endogenous access hurdles play a similarly selective role. In this vein of research, the second chapter studies the evolution of labor market composition under mentoring externalities. This chapter is joint work with Aniko Oery. We provide a continuous time, overlapping generations framework to analyze the costs and benefits of affirmative action policies if mentoring complementarities are present. Senior workers reduce the young population’s educational cost through mentoring, and thus act as ‘trailblazers’ for future generations. In such a framework, the main trade off is between using the most able workers and reducing mentorship misallocation. We identify conditions under which persistent market intervention is warranted to improve long-term surplus. We also contrast different channels through which the planner can affect market outcomes, and highlight the benefits of educational fellowships over hiring restrictions.