A Model of Collateral, Investment, and Adverse Selection

Alberto Martin

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relatively low; (ii) separating equilibria, in which investment is increasing in entrepreneurial wealth, are most likely to arise when entrepreneurial wealth is relatively high and; (iii) for a given interest rate, an increase in entrepreneurial wealth may generate a discontinuous fall in investment.

Keywords: Adverse Selection; Collateral; Investment; Lending Standards; Screening (search for similar items in EconPapers)
JEL-codes: D82 E44 G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta, nep-ent and nep-mac
Date: 2009-01
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Journal Article: A model of collateral, investment, and adverse selection (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:upf:upfgen:1136

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