Multiple borrowing and adverse selection in credit markets

Eric Van Tassel

Oxford Economic Papers, 2018, vol. 70, issue 1, 286-299

Abstract: An entrepreneur planning a risky expansion of his small business project may prefer to fund the expansion by soliciting several loans from different lenders. While this is inefficient due to the duplication of screening and monitoring costs, it works to the entrepreneur’s advantage if he can lower his risk premium. When entrepreneurs are able to take out multiple loans in equilibrium, it takes place within a pooling contract, characterized by cross-subsidization. This kind of borrowing in the credit market leads to high interest rates and, in some cases, market failure due to adverse selection.

JEL-codes: D82 D86 O12 O16 (search for similar items in EconPapers)
Date: 2018
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