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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)

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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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. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers, Edinburgh School of Economics, University of Edinburgh 1995-5, Edinburgh School of Economics, University of Edinburgh.
  2. Patrick Asea & S. Brook Blomberg, 1997. "Lending Cycles," UCLA Economics Working Papers, UCLA Department of Economics 764, UCLA Department of Economics.
  3. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 13(4), pages 458-495, October.
  4. Charles T. Carlstrom & Timothy S. Fuerst, 1996. "Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis," Working Paper, Federal Reserve Bank of Cleveland 9602, Federal Reserve Bank of Cleveland.
  5. Reichlin, Pietro & Siconolfi, Paolo, 2000. "Optimal Debt Contracts and Moral Hazard Along the Business Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2351, C.E.P.R. Discussion Papers.
  6. Suarez,J. & Sussman,O., 1995. "Endogenous Cycles in a Stiglitz-Weiss Economy," Papers, Centro de Estudios Monetarios Y Financieros- 9518, Centro de Estudios Monetarios Y Financieros-.
  7. Allen N. Berger, 2003. "The institutional memory hypothesis and the procyclicality on bank lending behavior," Proceedings, Federal Reserve Bank of Chicago 845, Federal Reserve Bank of Chicago.
  8. Dell''Ariccia, Giovanni & Marquez, Robert, 2005. "Lending Booms and Lending Standards," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5095, C.E.P.R. Discussion Papers.
  9. Rampini, Adriano A., 2004. "Entrepreneurial activity, risk, and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(3), pages 555-573, April.
  10. Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, American Economic Association, vol. 79(1), pages 14-31, March.
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