Adverse selection, endogenous borrowing constraints and firm growth
If banks face asymmetric information about loan quality, endogenous borrowing constraints which restrict the size of new firms may emerge in equilibrium. High quality firms reduce financing costs by starting off small and increasing their size over time.
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- Padilla, Atilano Jorge & Pagano, Marco, 1996. "Endogenous Communication Among Lenders and Entrepreneurial Incentives," CEPR Discussion Papers 1295, C.E.P.R. Discussion Papers.
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