Contestability and collateral in credit markets with adverse selection
The work discusses a basic proposition in the theory of competition in markets with adverse selection (Bester, 1985). By working out the sequence of market transactions, we show that the effectiveness of collateral in avoiding equilibrium rationing depends on an assumption of uncontestability of the loan market. If contestability is restored to its proper place, the separation of borrower by means of sufficient collateral does not impede the emergence of credit rationing, which results from a coordination failure among risk-neutral banks. As a consequence, even in a risk-neutral environment with suitable endowments, the use of collateral in credit contracts could not be a socially efficient screening-device. Our conclusion on rationing does not stand in contrast with the general result of Gale (1996).
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- Douglas Gale, 1996.
"Equilibria and Pareto optima of markets with adverse selection (*),"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 207-235.
- Gale, Douglas, 1996. "Equilibria and Pareto Optima of Markets with Adverse Selection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 207-235, February.
- Douglas Gale, 1994. "Equilibria and Pareto Optima of Markets with Adverse Selection," Papers 0046, Boston University - Industry Studies Programme.
- Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-689, October.
- Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
- Chan, Yuk-Shee & Thakor, Anjan V, 1987.
" Collateral and Competitive Equilibria with Moral Hazard and Private Information,"
Journal of Finance,
American Finance Association, vol. 42(2), pages 345-363, June.
- Yuk-Shee Chan & Anjan V. Thakor, 2004. "Collateral and Competitive Equilibria with Moral Hazard and Private Information," Finance 0411019, EconWPA.
- Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June.
- Schmidt-Mohr, Udo, 1997. "Rationing versus collateralization in competitive and monopolistic credit markets with asymmetric information," European Economic Review, Elsevier, vol. 41(7), pages 1321-1342, July.
- Stiglitz, Joseph E & Weiss, Andrew, 1992. "Asymmetric Information in Credit Markets and Its Implications for Macro-economics," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 694-724, October.
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