Competitive Equilibrium in the Credit Market under Asymmetric Information
AbstractWe study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers' default probabilities. Admissible credit contracts are characterized by the credit granting probability, the loan quantity, the loan interest rate and the collateral required. The principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers; moreover, the lower risk borrowers get more credit in equilibrium than they would with full information. No credit is rationed and collateral requirements are higher for the lower risk borrowers.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0411045.
Length: 16 pages
Date of creation: 30 Nov 2004
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Other versions of this item:
- Besanko, David & Thakor, Anjan V., 1987. "Competitive equilibrium in the credit market under asymmetric information," Journal of Economic Theory, Elsevier, vol. 42(1), pages 167-182, June.
- G - Financial Economics
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481, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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