Banking (Conservatively) with Optimists
AbstractCommercial banks frequently encounter optimistic entrepreneurs whose perceptions are biased by wishful thinking. Bankers are left with a difficult screening problem: separating realistic entrepreneurs from optimists who may be clever, knowledgeable, and completely sincere. We build a game-theoretic model of the screening process. We show that although entrepreneurs may practice self-restraint to signal realism, competition may lead banks to be insufficiently conservative in their lending, thus reducing capital-market efficiency. High collateral requirements decrease efficiency further. We discuss bank regulation and bankruptcy rules in connection with the problems that optimistic entrepreneurs present.
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Bibliographic InfoArticle provided by The RAND Corporation in its journal RAND Journal of Economics.
Volume (Year): 30 (1999)
Issue (Month): 2 (Summer)
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Web page: http://www.rje.org
Other versions of this item:
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- G20 - Financial Economics - - Financial Institutions and Services - - - General
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