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Information Asymmetries and an Endogenous Productivity Reversion Mechanism

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  • Nicolas Figueroa

    (CEA-DII Universidad de Chile))

  • Oksana Leukhina

    (University of North Carolina)

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    Abstract

    Several studies among recent empirical work have suggested that the systematic behavior of lending standards over the business cycle, with laxer standards applied during expansions and tighter standards applied during recessions, may be responsible for driving economic fluctuations. We build a dynamic screening model with informational asymmetries in credit markets that rationalizes these findings and generates endogenous fluctuations of total output and productivity. When the capital stock is high, which evolves endogenously, 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 inferred from such payments less informative. The cost that accomplishes successful screening thus rises, resulting in the emergence of pooling contracts which allow financing of low productivity entrepreneurs. The composition among capital producers then sets off a recession. The opposite happens at troughs.

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    Bibliographic Info

    Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 563.

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    Date of creation: 2008
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    Handle: RePEc:red:sed008:563

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    1. Allen N. Berger & Gregory F. Udell, 2003. "The institutional memory hypothesis and the procyclicality of bank lending behaviour," BIS Working Papers 125, Bank for International Settlements.
    2. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper 9602, Federal Reserve Bank of Cleveland.
    3. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
    4. Reichlin, Pietro & Siconolfi, Paolo, 2000. "Optimal Debt Contracts and Moral Hazard Along the Business Cycle," CEPR Discussion Papers 2351, C.E.P.R. Discussion Papers.
    5. Asea, Patrick K. & Blomberg, Brock, 1998. "Lending cycles," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 89-128.
    6. Allen N. Berger, 2003. "The institutional memory hypothesis and the procyclicality on bank lending behavior," Proceedings 845, Federal Reserve Bank of Chicago.
    7. Dell''Ariccia, Giovanni & Marquez, Robert, 2005. "Lending Booms and Lending Standards," CEPR Discussion Papers 5095, C.E.P.R. Discussion Papers.
    8. Suarez, Javier & Sussman, Oren, 1997. "Endogenous Cycles in a Stiglitz-Weiss Economy," CEPR Discussion Papers 1604, C.E.P.R. Discussion Papers.
    9. 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.
    10. Rampini, Adriano A., 2004. "Entrepreneurial activity, risk, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 555-573, April.
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