The repo market crash was a catalyst for the great recession in 2008-2009. I evaluate the quantitative importance of the following three factors in that crash: a drop in the price of residential mortgage-backed securities (RMBS), the liquidity drying up caused by asymmetric information in the RMBS market, and the run by repo lenders induced by changes in the fundamentals. On the theoretical side, the main contribution is to construct a tractable and parsimonious model to integrate the RMBS market with asymmetric information and the repo market with strategic complementary lenders. The two markets are connected by buyers in the RMBS market who use RMBS as collateral for borrowing in the repo market. I characterize the stochastic equilibrium of the economy where the quality of RMBS follows a Markov process. With calibration and simulation, the model yields the following quantitative results. First, besides the contribution of the price factor, the liquidity drying up caused by asymmetric information plays a crucial role in every aspect of the repo market crash. It explains 30% of the increase in haircut, 13% of the drop in total repo outstanding, and a large part of the increase in repo spread. Second, throughout the crisis, the fundamental-based run significantly affects the repo rate but only has a small effect on the repo haircut. Third, in addition to the three factors, the general equilibrium effect generated from the interactions between the RMBS market and the repo market explains 33% of the drop in total repo outstanding. I discuss the policy implications of these findings.

We study how heterogeneous factor-augmenting productivity shapes factor allocation. In Chinese manufacturing, more labor-productive firms have lower labor shares and employment but higher capital intensity. We prove that, under empirically motivated restrictions on factor-market frictions, this pattern requires heterogeneous relative factor-augmenting productivity. We use the Burdett-Mortensen monopsony model to identify firm-level capital- and labor-augmenting productivities and labor markdowns. China’s VAT reform provides validation: cheaper equipment raises calibrated capital- relative to labor-augmenting productivity. Counterfactuals show heterogeneity shapes employment allocation and the aggregate labor share. Incorporating it shifts inferred misallocation toward capital and reverses comovement between capital and labor marginal revenue products.