I study an adverse selection economy, where investors’ effort choice endogenously determines asset quality distribution. In booms, knowing that investors can easily sell assets, they exert less effort to improve the quality of their investment projects. This quality deterioration in turn makes the economy vulnerable to future exogenous shocks, because market breakdown becomes more likely. Relative to constrained efficient allocation, market liquidity tends to be too high in booms, while it is too low in recessions. The model highlights a novel channel through which systemic risk builds up during booms.