Adverse Selection of Investment Projects and the Business Cycle
AbstractIn an economy where entrepreneurs with unequal ‘abilities’ face alternative investment projects, which differ in their degree of risk and productivity, we analyse the Nash equilibrium contracts arising from a banks-borrowers game in the context of asymmetric information. We show that, for a particular characterization of the game, one can determine the endogenous distribution of projects and the ‘type’ of contracts (pooling or separating) as functions of the amount of loanable funds. We then apply this game to a general equilibrium aggregative economy with production, populated by overlapping generations of borrowers and lenders. We show that, for a range of parameter values, equilibria are characterized by persistent endogenous cycles.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1631.
Date of creation: Aug 1997
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Other versions of this item:
- Reichlin, P. & Siconolfi, P., 1998. "Adverse Selection of Investment Projects and the Business Cycle," Papers 326, Banca Italia - Servizio di Studi.
- Pietro Reichlin & Paolo Siconolfi, 1998. "Adverse Selection of Investment Projects and the Business Cycle," Temi di discussione (Economic working papers) 326, Bank of Italy, Economic Research and International Relations Area.
- A10 - General Economics and Teaching - - General Economics - - - General
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G20 - Financial Economics - - Financial Institutions and Services - - - General
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