Information Asymmetries and an Endogenous Productivity Reversion Mechanism
AbstractSeveral empirical studies suggest that the systematic behavior of lending standards, with laxer (tighter) standards applied during expansions (recessions) are responsible for reverting trends in aggregate productivity. We build a dynamic screening model with informational asymmetries in credit markets that rationalizes the observed dependence of lending standards on economic fundamentals and generates reversion of output and productivity trends via the lending standards channel. When the capital stock, which evolves endogenously, is high, liquidity is high for all types of producers, allowing even the unproductive type to meet the early payments on the loan, and thus making signals about entrepreneurs’ type, inferred from such payments, less informative. The early payment required to accomplish screening out the unproductive types thus rises. Because the early payment hurts productive entrepreneurs by restricting their investments, competition among lenders results in the selection of contracts with no screening. Low productivity entrepreneurs enter production along with productive types, the composition effect setting off a recession. The opposite happens for low enough values of capital. JEL Codes: E32, E44, D24.
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Bibliographic InfoPaper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 264.
Date of creation: 2009
Date of revision:
Find related papers by JEL classification:
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
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