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

Alberto Martin

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

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 from banks. 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 borrow from banks. If an additional market is added to provide entrepreneurs with additional funds, efficiency can be attained in equilibrium. An important characteristic of this additional market is that it must be non-exclusive, in the sense that entrepreneurs must be able to simultaneously borrow from many different lenders operating in it. This makes it possible to attain efficiency by pooling all entrepreneurs in the new market while separating them in the market for bank loans.

Keywords: Adverse Selection; Credit Markets; Collateral; Screening (search for similar items in EconPapers)
JEL-codes: D62 D82 G20 (search for similar items in EconPapers)
Date: 2008-04, Revised 2009-09
New Economics Papers: this item is included in nep-cta, nep-ent, nep-mic and nep-ppm
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Related works:
Working Paper: Adverse Selection, Credit, and Efficiency: the Case of the Missing Market (2011) Downloads
Working Paper: Adverse selection, credit, and efficiency: the case of the missing market (2010) Downloads
Working Paper: Adverse selection, credit and efficiency: The case of the missing market (2010) Downloads
Working Paper: Adverse Selection, Credit, and Efficiency: the Case of the Missing Market (2009)
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