Adverse selection, credit, and efficiency: the case of the missing market

Alberto Martin

No 526, Working Papers from Barcelona School of Economics

Abstract: We analyze a standard environment of adverse selection in credit markets. In our environment, entrepreneurs who are privately informed about the quality of their projects need to borrow in order to invest. Conventional wisdom says that, in this class of economies, the competitive equilibrium is typically inefficient. We show that this conventional wisdom rests on one implicit assumption: entrepreneurs can only access monitored lending. If a new set of markets is added to provide entrepreneurs with additional funds, efficiency can be attained in equilibrium. An important characteristic of these additional markets is that lending in them must be unmonitored, in the sense that it does not condition total borrowing or investment by entrepreneurs. This makes it possible to attain efficiency by pooling all entrepreneurs in the new markets while separating them in the markets for monitored loans.

Keywords: adverse selection; collateral; Credit Markets; monitored lending; Screening (search for similar items in EconPapers)
JEL-codes: D62 D82 G20 (search for similar items in EconPapers)
Date: 2015-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Adverse Selection, Credit, and Efficiency: the Case of the Missing Market (2011)
Working Paper: Adverse selection, credit and efficiency: The case of the missing market (2010)
Working Paper: Adverse Selection, Credit, and Efficiency: the Case of the Missing Market (2009)
Working Paper: Adverse selection, credit and efficiency: The case of the missing market (2009)
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