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Financial matchmakers in credit markets with heterogeneous borrowers

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  • Zsolt Becsi
  • Victor E. Li
  • Ping Wang

Abstract

What happens when liquidity increases in credit markets and more funds are channeled from borrowers to lenders? We examine this question in a general equilibrium model where financial matchmakers help borrowers (firms) and lenders (households) search out and negotiate profitable matches and where the composition of heterogeneous borrowers adjusts to satisfy equilibrium entry conditions. We find that enhanced liquidity causes entry by all borrowers and tends to benefit low-quality borrowers disproportionately. However, liquid credit markets may or may not be associated with higher output and welfare. The result is determined by whether the effect of higher market participation outweighs that of lower average quality. The net effect depends crucially on the source of the liquidity shock (financial matching efficacy, productivity, or entry barriers).

Suggested Citation

  • 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.
    • Handle: RePEc:fip:fedawp:2000-14
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    Cited by:

    1. Timo Vesala, 2007. "Financial Matching, Asymmetric Information and Entrepreneurial Risk Taking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(3), pages 469-485, September.
    2. Vesala, Timo, 2004. "Asymmetric information in credit markets and entrepreneurial risk taking," Research Discussion Papers 14/2004, Bank of Finland.
    3. Vesala, Timo, 2004. "Asymmetric information in credit markets and entrepreneurial risk taking," Bank of Finland Research Discussion Papers 14/2004, Bank of Finland.
    4. Ernst, Ekkehard & Semmler, Willi, 2010. "Global dynamics in a model with search and matching in labor and capital markets," Journal of Economic Dynamics and Control, Elsevier, vol. 34(9), pages 1651-1679, September.
    5. repec:zbw:bofrdp:2004_014 is not listed on IDEAS

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    More about this item

    Keywords

    Game theory; Financial markets; Liquidity (Economics);
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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