Asymmetric information in credit markets and entrepreneurial risk taking

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Title: Asymmetric information in credit markets and entrepreneurial risk taking
ISBN: 952-462-146-0
Author: Vesala, Timo
Organization: Suomen Pankki
Series: Suomen Pankin keskustelualoitteita
ISSN: 0785-3572
Series year: 2004
Series number: 14/2004
Year of publication: 2004
Publication date: 26.9.2004
Published in: Published in Scandinavian Journal of Economics, Volume 109, Issue 3, September 2007, pp. 469-485
Pages: 31 s.
Keywords: luotot; riskit; informaatio; yrittäjät; rahoitus; luottomarkkinat
Abstract: The paper constructs a search-theoretic model of credit markets with a bilateral trading mechanism that enables the manageable introduction of asymmetric information.Borrowers success probabilities are unobservable to financiers, but the degree of risk in observable projects can be used as a sorting device.We find that the efficiency of a perfect Bayesian equilibrium depends negatively/ positively on the credit market tightness /liquidity. In general equilibrium, where the underlying market conditions are endogenously determined, steady states with greater credit market tightness are always associated with increasingly excessive investment in risky projects.Since tighter market conditions also imply less intense competition among financiers, the commonly asserted trade-off between competition and efficiency does not emerge.Tighter monetary policy is shown to worsen the adverse effect of informational frictions on efficiency. Key words: credit market, asymmetric information, search, risk taking

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