Endogenous credit cycles
I develop an overlapping-generations framework in which changes in lending standards generate endogenous cycles. In my economy, entrepreneurs who are privately informed about the quality of their projects need to borrow funds. Intermediaries screen entrepreneurs both through the amount of investment undertaken and through the level of entrepreneurial net worth. I show that endogenous regime switches in financial contracts —from pooling to separating and vice-versa— may generate fluctuations even in the absence of exogenous shocks. When the economy is in the pooling (separating) regime, lending standards seem “lax” (“tight”) and investment is high (low). Differently from the existing literature, my model does not require entrepreneurial net worth to be counter cyclycal or inconsequential for determining aggregate investment.
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.:
- Townsend, Robert M., 1979.
"Optimal contracts and competitive markets with costly state verification,"
Journal of Economic Theory,
Elsevier, vol. 21(2), pages 265-293, October.
- Robert M. Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis.
- Reichlin Pietro, 1997. "Endogenous Cycles in Competitive Models: An Overview," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 1(4), pages 1-13, January.
- Ian Small, 2000. "Inventory investment and cash flow," Bank of England working papers 112, Bank of England.
- Alberto Martin, 2007.
"On Rothschild–Stiglitz as Competitive Pooling,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 371-386, May.
- Hellwig,Martin, 1986.
"Some recent developments in the theory of competition in markets with adverse selection,"
Discussion Paper Serie A
82, University of Bonn, Germany.
- Hellwig, Martin, 1987. "Some recent developments in the theory of competition in markets with adverse selection ," European Economic Review, Elsevier, vol. 31(1-2), pages 319-325.
- 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.
- Pietro Reichlin & Paolo Siconolfi, 2004. "Optimal debt contracts and moral hazard along the business cycle," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(1), pages 75-109, 07.
- Suarez, Javier & Sussman, Oren, 1997.
"Endogenous Cycles in a Stiglitz-Weiss Economy,"
CEPR Discussion Papers
1604, C.E.P.R. Discussion Papers.
- Longstaff, Francis A. & Piazzesi, Monika, 2004.
"Corporate earnings and the equity premium,"
Journal of Financial Economics,
Elsevier, vol. 74(3), pages 401-421, December.
- Ayhan Kose & Kenneth Rogoff & Eswar S Prasad & Shang-Jin Wei, 2003. "Effects of Financial Globalization on Developing Countries; Some Empirical Evidence," IMF Occasional Papers 220, International Monetary Fund.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
When requesting a correction, please mention this item's handle: RePEc:upf:upfgen:916. 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: ()
If references are entirely missing, you can add them using this form.