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The banking firm: the role of signaling with collaterals

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  • Bieta, Volker
  • Broll, Udo
  • Siebe, Wilfried
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    Abstract

    In this paper we challenge basic results of signaling models. In our banking model each project of a borrower is described by a continuous density of outcomes. Different density functions are classified according to second stochastisch dominance. Combining these features we find that in a banking model collateral is no longer in a position to signal the degree of riskiness of the borrower to the lender. In most cases the equilibrium is a pooling equilibrium. --

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    Bibliographic Info

    Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 04/08.

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    Date of creation: 2008
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    Handle: RePEc:zbw:tuddps:0408

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    Web page: http://www.tu-dresden.de/wiwi/
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    Related research

    Keywords: Signaling; collateral; perfect Bayesian equilibrium;

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    1. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 17(1), pages 84-95, February.
    2. Milde, Hellmuth & Riley, John G, 1988. "Signaling in Credit Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 103(1), pages 101-29, February.
    3. Udo Broll & Bernhard Eckwert, 2006. "Transparency in the interbank market and the volume of bank intermediated loans," International Journal of Economic Theory, The International Society for Economic Theory, The International Society for Economic Theory, vol. 2(2), pages 123-133.
    4. Wong, Kit Pong, 1992. "Debt, collateral, and renegotiation under moral hazard," Economics Letters, Elsevier, Elsevier, vol. 40(4), pages 465-471, December.
    5. Eckwert, B. & Zilcha, I., 1999. "Incomplete Risk Sharing Arrangements and the Value of Information," Papers, Tel Aviv 13-99, Tel Aviv.
    6. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, Econometric Society, vol. 58(2), pages 429-52, March.
    7. David Besanko & Anjan V. Thakor, 2004. "Competitive Equilibrium in the Credit Market under Asymmetric Information," Finance, EconWPA 0411045, EconWPA.
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