Information Acquisition and Government Interventon in Credit Markets

Robin Boadway and Motohiro Sato

Journal of Public Economic Theory, 1999, vol. 1, issue 3, 283-308

Abstract: Market failure in the financing of risky projects is studied. Project risk includes idiosyncratic and aggregate components. Banks can investigate aggregate risk and can evaluate the idiosyncratic risk of each entrepreneur. They engage in Bertrand competition for entrepreneurs using interest rates. Information obtained by a bank on aggregate risk is fully revealed, and that on entrepreneur‐specific risk is partly revealed. Banks will not investigate aggregate risk and will evaluate entrepreneurs too intensively. Efficiency can be improved by public acquisition of information on industry risk and by loan guarantees partially covering losses on projects that fail.

Date: 1999
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https://doi.org/10.1111/1097-3923.00013

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Working Paper: Information Acquisition and Government Intervention in Credit Markets (1997)
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