Signaling in Credit Markets
In this paper, the authors show that, under a variety of alternative assumptions about the private informati on of loan applicants, a competitive market for loans is characterize d by screening. Banks separate out loan risks by offering higher loan s at higher interest rates. Depending on the nature of the informatio nal asymmetry, it may be that applicants with less risky projects sel ect larger rather than smaller loans. Comparative statics implication s are also examined. In particular, the authors explore the effects o f an increase in banks' cost of funds on average loan quality. Copyright 1988, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Volume (Year): 103 (1988)
Issue (Month): 1 (February)
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- Riley, John G., 1975.
Journal of Economic Theory,
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- 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.
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