Adverse Selection of Investment Projects and the Business Cycle

Pietro Reichlin and Paolo Siconolfi
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Paolo Siconolfi: Columbia University

No 326, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: In an economy where entrepreneurs with unequal "abilities" face alternative investment projects, which differ in degree of risk and productivity, we analyse the Nash equilibrium contracts arising from a banks-borrowers game in the context of asymmetric information. We show that, for a particular characterization of the game, one can determine the endogenous distribution of projects and the "type" of contracts (pooling or separating) as functions of the amount of loanable funds. We set this game in a general equilibrium aggregative economy with production, populated by overlapping generations of borrowers and lenders and show that for a range of the parameter values equilibria are characterized by persistent endogenous cycles.

Keywords: adverse selection; business cycles; investment projects (search for similar items in EconPapers)
JEL-codes: C70 D82 E22 E32 (search for similar items in EconPapers)
Date: 1998-02
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Adverse Selection of Investment Projects and the Business Cycle (1998)
Working Paper: Adverse Selection of Investment Projects and the Business Cycle (1997)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_326_98

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