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Sequential credit markets

Author

Listed:
  • Axelson, Ulf
  • Makarov, Igor

Abstract

Entrepreneurs typically seek financing in decentralized markets, where they approach investors sequentially. We develop a model of sequential capital markets with privately informed investors. The sequential market creates a dynamic adverse selection externality that leads to overinvestment and excessive rents to intermediaries, even as the number of competing investors becomes arbitrary large. The resulting rents lead to excessive entry of investors and insufficient entry of entrepreneurs. Moving to a centralized market structure or reducing transparency restores competitiveness but may harm efficiency. The model also explains how even a small skill advantage for an investor can lead to preferential deal flow and outsized returns.

Suggested Citation

  • Axelson, Ulf & Makarov, Igor, 2026. "Sequential credit markets," LSE Research Online Documents on Economics 130383, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:130383
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    File URL: https://researchonline.lse.ac.uk/id/eprint/130383/
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    Keywords

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    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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