Information Asymmetries and an Endogenous Productivity Reversion Mechanism
Several studies among recent empirical work have suggested that the systematic behavior of lending standards over the business cycle, with laxer standards applied during expansions and tighter standards applied during recessions, may be responsible for driving economic fluctuations. We build a dynamic screening model with informational asymmetries in credit markets that rationalizes these findings and generates endogenous fluctuations of total output and productivity. When the capital stock is high, which evolves endogenously, liquidity is high for all types of producers, allowing even the unproductive type to meet the early payments on the loan, and thus making signals inferred from such payments less informative. The cost that accomplishes successful screening thus rises, resulting in the emergence of pooling contracts which allow financing of low productivity entrepreneurs. The composition among capital producers then sets off a recession. The opposite happens at troughs.
|Date of creation:||2008|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Suarez, Javier & Sussman, Oren, 1997.
"Endogenous Cycles in a Stiglitz-Weiss Economy,"
Journal of Economic Theory,
Elsevier, vol. 76(1), pages 47-71, September.
- Charles T. Carlstrom & Timothy S. Fuerst, 1996.
"Agency costs, net worth, and business fluctuations: a computable general equilibrium analysis,"
9602, Federal Reserve Bank of Cleveland.
- Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
- John Moore & Nobuhiro Kiyotaki, .
1995-5, Edinburgh School of Economics, University of Edinburgh.
- Pietro Reichlin & Paolo Siconolfi, 2004.
"Optimal debt contracts and moral hazard along the business cycle,"
Springer, vol. 24(1), pages 75-109, 07.
- Reichlin, Pietro & Siconolfi, Paolo, 2000. "Optimal Debt Contracts and Moral Hazard Along the Business Cycle," CEPR Discussion Papers 2351, C.E.P.R. Discussion Papers.
- DellAriccia, Giovanni & Marquez, Robert, 2005.
"Lending Booms and Lending Standards,"
CEPR Discussion Papers
5095, C.E.P.R. Discussion Papers.
- Patrick Asea & S. Brook Blomberg, 1997.
UCLA Economics Working Papers
764, UCLA Department of Economics.
- Allen N. Berger, 2003. "The institutional memory hypothesis and the procyclicality on bank lending behavior," Proceedings 845, Federal Reserve Bank of Chicago.
- Rampini, Adriano A., 2004. "Entrepreneurial activity, risk, and the business cycle," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 555-573, April.
- Berger, Allen N. & Udell, Gregory F., 2004.
"The institutional memory hypothesis and the procyclicality of bank lending behavior,"
Journal of Financial Intermediation,
Elsevier, vol. 13(4), pages 458-495, October.
- Allen N. Berger & Gregory F. Udell, 2003. "The institutional memory hypothesis and the procyclicality of bank lending behaviour," BIS Working Papers 125, Bank for International Settlements.
- Allen N. Berger & Gregory F. Udell, 2003. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Finance and Economics Discussion Series 2003-02, Board of Governors of the Federal Reserve System (U.S.).
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
When requesting a correction, please mention this item's handle: RePEc:red:sed008:563. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.