Adverse Selection In Credit Markets With Costly Screening
نویسندگان
چکیده
We develop a credit market model with adverse selection where risk-neutral borrowers self select because lenders make use of a costly screening technology. The model has some features which are similar to the Rothschild-Stiglitz adverse selection model. If an equilibrium exists it is a separating equilibrium, and there exist parameter values for which an equilibrium does not exist. Equilibrium contracts are debt contracts, and this is robust to randomization, in contrast to results for the costly state verification model. This framework can be extended to permit optimal financial intermediary structures, and it potentially has many applications. We thank Ed Green, Jeff Lacker, Narayana Kocherlakota, and seminar participants at the University of Iowa for helpful comments and suggestions. Financial support is acknowledged from the National Science Foundation, grant SBR 93-08819.
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