Credit mismatch and breakdown

Zsolt Becsi (), Victor E. Li and Ping Wang

European Economic Review, 2013, vol. 59, issue C, 109-125

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 incentive-based equilibrium credit rationing. More generally, entry and incentive frictions are important in understanding the extent of credit rationing and credit mismatch, while search and incentive 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: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:59:y:2013:i:c:p:109-125

DOI: 10.1016/j.euroecorev.2012.11.002

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