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Financial Matching, Asymmetric Information and Entrepreneurial Risk Taking

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  • Timo Vesala

Abstract

We study financial matching in credit markets when entrepreneurs have private information about their success potential. Entrepreneurs can search for financing for either a “risky” or a “safe” investment and only the risky project is sensitive to entrepreneurs' intrinsic “types”. There is excess risk taking in the sense that entrepreneurs with inefficiently low success probabilities choose the risky investment. However, steady states featuring greater market liquidity are associated with higher efficiency. As market liquidity also reflects the intensity of competition among financiers, earlier results which indicate a negative relationship between competition and allocative efficiency do not hold in our setup.

Suggested Citation

  • Timo Vesala, 2007. "Financial Matching, Asymmetric Information and Entrepreneurial Risk Taking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 469-485, September.
    • Handle: RePEc:bla:scandj:v:109:y:2007:i:3:p:469-485
    DOI: 10.1111/j.1467-9442.2007.00505.x
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    References listed on IDEAS

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    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, December.
    2. Muthoo,Abhinay, 1999. "Bargaining Theory with Applications," Cambridge Books, Cambridge University Press, number 9780521576475.
    3. Marja-Liisa Halko & Klaus Kultti & Juha Virrankoski, 2005. "Wage Distribution with a Two-Sided Job Auction," 2005 Meeting Papers 518, Society for Economic Dynamics.
    4. Leonard I. Nakamura, 1993. "Loan screening within and outside of customer relationships," Working Papers 93-15, Federal Reserve Bank of Philadelphia.
    5. repec:zbw:bofrdp:2004_014 is not listed on IDEAS
    6. Zsolt Becsi & Victor E. Li & Ping Wang, 2000. "Financial matchmakers in credit markets with heterogeneous borrowers," FRB Atlanta Working Paper 2000-14, Federal Reserve Bank of Atlanta.
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    Cited by:

    1. Danilo Liberati, 2018. "An estimated DSGE model with search and matching frictions in the credit market," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 11(6), pages 567-617.
    2. Jokivuolle, Esa & Kiema, Ilkka & Vesala, Timo, 2009. "Credit allocation, capital requirements and procyclicality," Research Discussion Papers 23/2009, Bank of Finland.
    3. repec:zbw:bofrdp:2007_013 is not listed on IDEAS
    4. repec:zbw:bofrdp:2009_023 is not listed on IDEAS
    5. Jokivuolle, Esa & Kiema, Ilkka & Vesala, Timo, 2009. "Credit allocation, capital requirements and procyclicality," Bank of Finland Research Discussion Papers 23/2009, Bank of Finland.
    6. Jokivuolle, Esa & Vesala, Timo, 2007. "Portfolio effects and efficiency of lending under Basel II," Bank of Finland Research Discussion Papers 13/2007, Bank of Finland.
    7. Jokivuolle, Esa & Vesala, Timo, 2007. "Portfolio effects and efficiency of lending under Basel II," Research Discussion Papers 13/2007, Bank of Finland.

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