Advanced Search
MyIDEAS: Login to save this paper or follow this series

Asymmetric information in credit markets and entrepreneurial risk taking

Contents:

Author Info

  • Vesala , Timo

    (RUESG, , University of Helsinki)

Registered author(s):

    Abstract

    The paper constructs a search-theoretic model of credit markets with a bilateral trading mechanism that enables the manageable introduction of asymmetric information. Borrowers´ success probabilities are unobservable to financiers, but the degree of risk in observable projects can be used as a sorting device. We find that the efficiency of a perfect Bayesian equilibrium depends negatively/positively on the credit market ´tightness´/liquidity. In general equilibrium, where the underlying market conditions are endogenously determined, steady states with greater credit market tightness are always associated with increasingly excessive investment in risky projects. Since tighter market conditions also imply less intense competition among financiers, the commonly asserted trade-off between competition and efficiency does not emerge. Tighter monetary policy is shown to worsen the adverse effect of informational frictions on efficiency.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0414.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 14/2004.

    as in new window
    Length: 35 pages
    Date of creation: 14 Jul 2004
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2004_014

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
    More information through EDIRC

    Related research

    Keywords: credit market; asymmetric information; search; risk taking;

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, pages 453-486.
    2. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    3. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2003. "Bank Concentration and Crises," NBER Working Papers 9921, National Bureau of Economic Research, Inc.
    4. Matutes, Carmen & Vives, Xavier, 1995. "Imperfect Competition, Risk Taking, and Regulation in Banking," CEPR Discussion Papers 1177, C.E.P.R. Discussion Papers.
    5. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
    6. Zsolt Becsi & Victor Li & Ping Wang, 2000. "Financial matchmakers in credit markets with heterogeneous borrowers," Working Paper 2000-14, Federal Reserve Bank of Atlanta.
    7. Ariel Rubinstein, 2010. "Perfect Equilibrium in a Bargaining Model," Levine's Working Paper Archive 661465000000000387, David K. Levine.
    8. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475.
    9. Carletti, Elena & Hartmann, Philipp, 2002. "Competition and stability: what's special about banking?," Working Paper Series 0146, European Central Bank.
    10. Tuomas Takalo & Otto Toivanen, 2004. "Equilibrium in financial markets with adverse selection," Finance 0405001, EconWPA.
    11. Etienne Wasmer & Philippe Weil, 2004. "The Macroeconomics of Labor and Credit Market Imperfections," American Economic Review, American Economic Association, vol. 94(4), pages 944-963, September.
    12. Bester, Helmut, 1988. "Bargaining, Search Costs and Equilibrium Price Distributions," Review of Economic Studies, Wiley Blackwell, vol. 55(2), pages 201-14, April.
    13. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
    14. David de Meza, 2002. "Overlending?," Economic Journal, Royal Economic Society, vol. 112(477), pages F17-F31, February.
    15. Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June.
    16. Diamond, Peter, 1990. "Pairwise Credit in Search Equilibrium," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 285-319, May.
    17. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
    18. Klaus Kultti & Juha Virrankoski, 2004. "Option to wait in a search model," Spanish Economic Review, Springer, vol. 6(2), pages 153-158, 07.
    19. Laing, Derek & Palivos, Theodore & Wang, Ping, 1995. "Learning, Matching and Growth," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 115-29, January.
    20. Kanniainen, Vesa & Leppämäki, Mikko, 2002. "Financial institutions and the allocation of talent," Research Discussion Papers 5/2002, Bank of Finland.
    21. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:hhs:bofrdp:2004_014. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.