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A note on the costly state verification problem with information gathering

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  • Rivero-Leiva, David

Abstract

This article adds entrepreneurial heterogeneity and information processing into a costly state verification model. The aim is to solve some of the limitations of the financial accelerator theory to account for the impact of financial conditions on the risk composition of banks. In a model where banks trade-off information production at different stages of the lending relationship, net worth enhancements improve the composition of credit. Improvements in project selection mitigate agency costs and foster the borrowing capacity of firms. These partial equilibrium results highlight the role of information channels as potential amplifiers of small fundamental shocks.

Suggested Citation

  • Rivero-Leiva, David, 2022. "A note on the costly state verification problem with information gathering," Finance Research Letters, Elsevier, vol. 50(C).
    • Handle: RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004925
    DOI: 10.1016/j.frl.2022.103313
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial accelerator; Heterogeneous firms; Screening; Monitoring;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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