Adverse Selection and Search Frictions in Corporate Loan Contracts
2014 (English)Conference paper (Refereed)
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.
Place, publisher, year, edition, pages
CESIS/KTH , 2014.
, CESIS Electronic Working Paper Series, 350
Research subject Economics
IdentifiersURN: urn:nbn:se:kth:diva-184725OAI: oai:DiVA.org:kth-184725DiVA: diva2:916729
Financial Management Association Meeting