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Financial Matchmakers in Credit Markets with Heterogeneous Borrowers

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Author Info
Zsolt Becsi (Federal Reserve Bank of Atlanta and Louisiana State University)
Victor Li (US Naval Academy)
Ping Wang () (Department of Economics, Vanderbilt University)

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Abstract

What happens when liquidity increases in credit markets and more funds are channeled from borrowers to lenders? We examine this question in a general equilibrium model where financial matchmakers help borrowers (firms) and lenders (households) search out and negotiate profitable matches and where the composition of heterogeneous borrowers adjusts to satisfy equilibrium entry conditions. We find that enhanced liquidity causes entry by all borrowers and tends to benefit low quality borrowers disproportionately. However, liquid credit markets may or may not be associated with higher output and welfare. The result is determined by whether the effect of higher market participation outweighs that of lower average quality. The net effect depends crucially on the source of the liquidity shock (financial matching efficacy, productivity, or entry barriers).

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File URL: http://www.vanderbilt.edu/econ/wparchive/workpaper/vu00-w32R.pdf
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File Function: Revised version, 2002
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0032.

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Date of creation: Aug 2000
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Handle: RePEc:van:wpaper:0032

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Related research
Keywords: Credit search; assortive financial matchmaking; market participation versus composition effects;

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Find related papers by JEL classification:
C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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    Other versions:
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Cited by:
(explanations, 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.)

  1. Vesala , Timo, 2004. "Asymmetric information in credit markets and entrepreneurial risk taking," Research Discussion Papers 14/2004, Bank of Finland. [Downloadable!]
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