Costly Information Production Equilibria in the Bank Credit Market with Applications to Credit Rationing

Anjan V. Thakor () and Richard Callaway
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Richard Callaway: Indiana University

Finance from EconWPA

Abstract: In this paper we explore the nature of equilibria in an asymmetrically informed bank credit market in which credit applicants know their own (intrinsic) default risks, but potential lenders can discover these default risks only by expending resources to produce information. The resolution of informational asymmetries in the capital market is, in the contemporary view, considered a very import function served by financial intermediaries like commercial banks and, in the opinion of some, even the primary justification for their existence. We, therefore, focus on how the presence of asymmetrice information--in particular, the response of (expected) profit-maximizing banks to it--affects the equilibrium prices and quantities of credit offered in the banking system.

JEL-codes: G (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: Written 2004-11-11
Note: Type of Document - pdf; pages: 29
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