Adverse Selection and Search Frictions in Corporate Loan Contracts
Mehdi Beyhaghi (),
Babak Mahmoudi () and
Ali Mohammadi ()
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Mehdi Beyhaghi: College of Business, University of Texas at San Antonio, Postal: 1 UTSA Circle, , San Antonio, , TX 78249, , United States
Babak Mahmoudi: School of Humanities and Social Sciences, Nazarbayev University, Postal: 53, Kabanbay batyr Ave., , Astana, 010000, , Republic of Kazakhstan
No 350, Working Paper Series in Economics and Institutions of Innovation from Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies
We provide empirical evidence of both (1) price dispersion and (2) credit rationing in the corporate loan market. We argue that these properties are caused by two factors: an adverse selection resulting from the information asymmetry between lenders and borrowers, and search frictions in matching borrowers with lenders. We develop a model of loan markets in which lenders post an array of heterogeneous contracts, then borrowers tradeoff terms of loan contracts and matching probability between themselves. We show that a unique separating equilibrium exists where each type of borrower applies to a certain type of contract.
Keywords: loan contract; capital structure; debt heterogeneity; adverse selection; competitive search (search for similar items in EconPapers)
JEL-codes: D86 G20 G21 G32 (search for similar items in EconPapers)
Pages: 30 pages
New Economics Papers: this item is included in nep-ban and nep-cta
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Working Paper: Adverse Selection and Search Frictions in Corporate Loan Contracts (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:cesisp:0350
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