A model of collateral, investment, and adverse selection

Alberto Martin

Journal of Economic Theory, 2009, vol. 144, issue 4, 1572-1588

Abstract: This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relatively low; (ii) separating equilibria, in which investment is increasing in entrepreneurial wealth, are most likely to arise when entrepreneurial wealth is relatively high and; (iii) for a given interest rate, an increase in entrepreneurial wealth may generate a discontinuous fall in investment.

Keywords: Adverse; selection; Collateral; Investment; Lending; standards; Screening (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:144:y:2009:i:4:p:1572-1588

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