Adverse Selection in Credit Markets with Costly Screening
#abstract# We develop a credit market model with adverse selection where risk-neutral borrowers self select because lenders make use of a costly screening technology. The model has some features which are similar to the Rothschild-Stiglitz adverse selection model. If an equilibrium exists it is a separating equilibrium, and there exist parameter values for which an equilibrium does not exist. Equilibrium contracts are debt contracts, and this is robust to randomization, in contrast to results for the costly state verification model. This framework can be extended to permit optimal financial intermediary structures, and it potentially has many applications.
|Date of creation:||28 Oct 1993|
|Date of revision:||02 Nov 1993|
|Note:||Zipped using PKZIP v2.04, encoded using UUENCODE v5.15. Zipped file includes 4 files -- AD.093 (body in TeX 34 pages), QQAAGEOJ.STY, GEOPHYSI.STY, and TCILATEX.TEX|
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