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Costly Information Production Equilibria in the Bank Credit Market with Applications to Credit Rationing

Published online by Cambridge University Press:  06 April 2009

Anjan V. Thakor  and
Richard Callaway
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Extract

In this paper, we explore the nature of equilibria in an asymmetrically informed bank credit market in which credit applicants know their own (intrinsic) default risks, but potential lenders can discover these default risks only by expending resources to produce information. The resolution of informational asymmetries in the capital market is, in the contemporary view, considered a very important function served by financial intermediaries like commercial banks and, in the opinion of some, even the primary justification for their existence [17]. We, therefore, focus on how the presence of asymmetric information—in particular, the response of (expected) profit-maximizing banks to it—affects the equilibrium prices and quantities of credit offered in the banking system.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 18 , Issue 2 , June 1983 , pp. 229 - 256
Copyright
Copyright © School of Business Administration, University of Washington 1983

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