The Equilibrium Allocation of Investment Capital in the Presence of Adverse Selection and Costly State Verification
AbstractWe consider credit rationing in an environment with adverse selection and costly state verification. The presence of costly state verification permits debt contracts to emerge under conditions that we specify. When debt contracts are observed, so is credit rationing. This rationing occurs even if it is possible for rationed borrowers to bid up expected returns to lenders and hence is voluntary. We also show how the adverse selection and costly state verification problems interact and investigate how improvements in information gathering technology impact on the extent of credit rationing.
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Bibliographic InfoArticle provided by Springer in its journal Economic Theory.
Volume (Year): 3 (1993)
Issue (Month): 3 (July)
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Web page: http://link.springer.de/link/service/journals/00199/index.htm
Other versions of this item:
- Boyd, J.h. & Smith, B.D., 1991. "The Equilibrium Allocation of Investment Capital in the Presence of Adverse Selection and Costly State Verification," RCER Working Papers 289, University of Rochester - Center for Economic Research (RCER).
- H1 - Public Economics - - Structure and Scope of Government
- L5 - Industrial Organization - - Regulation and Industrial Policy
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
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