Sequential credit markets

Ulf Axelson and Igor Makarov

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Entrepreneurs typically seek financing in decentralized markets, where they approach investors sequentially. We develop a model of sequential capital markets with privately informed investors. The sequential market creates a dynamic adverse selection externality that leads to overinvestment and excessive rents to intermediaries, even as the number of competing investors becomes arbitrary large. The resulting rents lead to excessive entry of investors and insufficient entry of entrepreneurs. Moving to a centralized market structure or reducing transparency restores competitiveness but may harm efficiency. The model also explains how even a small skill advantage for an investor can lead to preferential deal flow and outsized returns.

Keywords: credit markets; directed search; dynamic adverse selection (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2026-02-28
References: Add references at CitEc
Citations:

Published in Journal of Financial Economics, 28, February, 2026, 176. ISSN: 0304-405X

Downloads: (external link)
http://eprints.lse.ac.uk/130383/ Open access version. (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Unavailable (http://eprints.lse.ac.uk/130383/ [301 Moved Permanently]--> https://eprints.lse.ac.uk/130383/)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:130383

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().