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Adverse Selection in Credit Markets with Costly Screening

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Author Info
Cheng Wang
Stephen D. Williamson

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Abstract

#abstract# We develop a credit market model with adverse selection where risk-neutral borrowers self select because lenders make use of a costly screening technology. The model has some features which are similar to the Rothschild-Stiglitz adverse selection model. If an equilibrium exists it is a separating equilibrium, and there exist parameter values for which an equilibrium does not exist. Equilibrium contracts are debt contracts, and this is robust to randomization, in contrast to results for the costly state verification model. This framework can be extended to permit optimal financial intermediary structures, and it potentially has many applications.

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Publisher Info
Paper provided by EconWPA in its series Finance with number 9310001.

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Length: 34 pages
Date of creation: 28 Oct 1993
Date of revision: 02 Nov 1993
Handle: RePEc:wpa:wuwpfi:9310001

Note: Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 4 files -- AD.093 (body in TeX 34 pages), QQAAGEOJ.STY, GEOPHYSI.STY, and TCILATEX.TEX
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G - Financial Economics

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.:

  1. Williamson, Stephen D, 1987. "Financial Intermediation, Business Failures, and Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1196-1216, December. [Downloadable!] (restricted)
  2. Jeffrey M. Lacker, 1998. "Collateralized debt as the optimal contract," Working Paper 98-04, Federal Reserve Bank of Richmond. [Downloadable!]
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  3. Williamson, Stephen D, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 135-45, February. [Downloadable!] (restricted)
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  4. John H. Boyd & Edward C. Prescott & Bruce D. Smith, 1988. "Organizations in economic analysis," Working Papers 385, Federal Reserve Bank of Minneapolis.
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  5. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Blackwell Publishing, vol. 52(4), pages 647-63, October. [Downloadable!] (restricted)
  6. Innes, Robert D., 1990. "Limited liability and incentive contracting with ex-ante action choices," Journal of Economic Theory, Elsevier, vol. 52(1), pages 45-67, October. [Downloadable!] (restricted)
  7. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Blackwell Publishing, vol. 51(3), pages 393-414, July. [Downloadable!] (restricted)
  8. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  9. De Meza, David & Webb, David C., 1988. "Credit market efficiency and tax policy in the presence of screening costs," Journal of Public Economics, Elsevier, vol. 36(1), pages 1-22, June. [Downloadable!] (restricted)
  10. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September. [Downloadable!] (restricted)
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  11. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October. [Downloadable!] (restricted)
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(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. Stephen D. Williamson, 1995. "Discount Window Lending and Deposit Insurance," Macroeconomics 9504001, EconWPA, revised 18 Apr 1995. [Downloadable!]
    Other versions:
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