Financing Competitive Asset Bids When Information is Asymmetric: The Role of Collateral as a Signal

C. Hyde and J. Vercammen

No 662, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: In this paper, borrowing agents require capital to finance competitive bids for a single productive asset rather than requiring capital for individual projects. Loan size is no longer effective as a signaling mechanism. Instead, high quality agents will either offer a sufficiently high level of collateral to signal their type or choose to pool with low quality agents. A pooling equilibrium will emerge if the implicit cost of signaling is too high but then high quality borrowers must bid against all borrowers rather than only their own type.

Keywords: CREDIT; BORROWING; ASYMETRIC INFORMATION (search for similar items in EconPapers)
JEL-codes: G10 G20 (search for similar items in EconPapers)
Pages: 30 pages
Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:662

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