Essays in Financial Markets

Chapter 1. In the United States, building infrastructure is primarily the responsibility of municipal governments. However, prior empirical evidence suggests these governments are borrowing-constrained. This paper provides new evidence and theory that link the constraint to the dominance of retail investors in the municipal bond market, who pay less attention to new bond issues than more specialized investors, such as municipal mutual funds. Supporting this hypothesis, I find that the mutual funds disproportionately buy newly issued bonds and gradually resell them to other investors. Furthermore, a 1% inflow to the mutual fund sector increases bond issuance by county governments by 0.2% and reduces the interest rate by 0.2 basis points in the next quarter. To rationalize these observations, I develop a dynamic model featuring end investors who exhibit sluggish portfolio adjustments and invest in bonds directly or indirectly through some attentive mutual funds. By calibrating the model with the empirical estimates, I find that the elasticity of bond demand is at least one order of magnitude smaller in the short run than in the long run, suggesting that the municipal bond market is not resilient against shocks in the short run. This finding supports market interventions by the federal government in times of crisis, especially when they accompany massive outflows from municipal mutual funds. Chapter 2. After initial investments, relationship financiers typically observe interim information about projects before continuing financing them. Meanwhile, entrepreneurs produce information endogenously and issue securities to incumbent insider and competitive outsider investors. In such persuasion games with differentially informed receivers and contingent transfers, entrepreneurs' endogenous experimentation reduces insiders' information monopoly but impedes relationship formation through an ``information production hold-up.'' Insiders' information production and interim competition mitigate this hold-up, and jointly explain empirical links between competition and relationship lending. Optimal contracts restore first-best outcomes using convertible securities for insiders and residuals for outsiders. Our findings are robust under various extensions and alternative specifications. Chapter 3. I examine how differences in the ability to identify profitable investment opportunities contribute to wealth inequality. I analyze a model of financial markets with investors heterogeneously informed about future returns. The unconditional wealth share distribution features a thick right-tail populated by the best-informed investors, explaining the prominent representation of high-profile investors among the super-rich. Wealth inequality increases with the cost of information acquisition and market liquidity. It is non-monotone in public information precision and the size of investments delegated to the best-informed investors