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Multiple borrowing and adverse selection in credit markets

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  • Eric Van Tassel

Abstract

An entrepreneur planning a risky expansion of his small business project may prefer to fund the expansion by soliciting several loans from different lenders. While this is inefficient due to the duplication of screening and monitoring costs, it works to the entrepreneur’s advantage if he can lower his risk premium. When entrepreneurs are able to take out multiple loans in equilibrium, it takes place within a pooling contract, characterized by cross-subsidization. This kind of borrowing in the credit market leads to high interest rates and, in some cases, market failure due to adverse selection.

Suggested Citation

  • Eric Van Tassel, 2018. "Multiple borrowing and adverse selection in credit markets," Oxford Economic Papers, Oxford University Press, vol. 70(1), pages 286-299.
    • Handle: RePEc:oup:oxecpp:v:70:y:2018:i:1:p:286-299.
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    File URL: http://hdl.handle.net/10.1093/oep/gpx038
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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