A note on the costly state verification problem with information gathering

David Rivero-Leiva

Finance Research Letters, 2022, vol. 50, issue C

Abstract: This article adds entrepreneurial heterogeneity and information processing into a costly state verification model. The aim is to solve some of the limitations of the financial accelerator theory to account for the impact of financial conditions on the risk composition of banks. In a model where banks trade-off information production at different stages of the lending relationship, net worth enhancements improve the composition of credit. Improvements in project selection mitigate agency costs and foster the borrowing capacity of firms. These partial equilibrium results highlight the role of information channels as potential amplifiers of small fundamental shocks.

Keywords: Financial accelerator; Heterogeneous firms; Screening; Monitoring (search for similar items in EconPapers)
JEL-codes: E44 G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:50:y:2022:i:c:s1544612322004925

DOI: 10.1016/j.frl.2022.103313

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