Credit Mismatch and Breakdown

Zsolt Becsi (), Victor Li () and Ping Wang
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Victor Li: Department of Economics, Villanova School of Business, Villanova University, https://www1.villanova.edu/university/business/faculty-and-research/faculty-by-department/biodetail.html?mail=victor.li@villanobio_long

No 7, Villanova School of Business Department of Economics and Statistics Working Paper Series from Villanova School of Business Department of Economics and Statistics

Abstract: This paper studies the phenomenon of mismatch in a decentralized credit market where borrowers and lenders must engage in costly search to establish credit relationships. Our dynamic general equilibrium framework integrates incentive based informational frictions with a matching process highlighted by (i) borrowers’ endogenous market entry and exit decision (entry frictions) and (ii) time and resource costs necessary to locate credit opportunities (search frictions). A key feature of the incentive compatible loan contract negotiated between borrowers and lenders is the interaction of informational frictions (in the form of moral hazard) with entry and search frictions. We find that the removal of entry barriers can eliminate information-based equilibrium credit rationing. More generally, entry and incentive frictions are important in understanding the extent of credit rationing, while entry and search frictions are important for understanding credit market breakdown.

Keywords: Entry; Moral Hazard; Credit Rationing; Credit Mismatch; Credit-Market Breakdown (search for similar items in EconPapers)
JEL-codes: C78 D82 D83 E44 (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-cta, nep-dge, nep-fmk and nep-ure
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http://repec.library.villanova.edu/workingpapers/VSBEcon7.pdf (application/pdf)

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Journal Article: Credit mismatch and breakdown (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:vil:papers:7

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