Dysfunctional Finance : Positive Shocks and Negative Outcomes
n financial markets with asymmetric information about mean returns, borrowers with different default risks may pay the same rate of interest. If they do, the marginal borrower will have a high-risk, negative-value project. Under some conditions, technological change that increases each entrepreneur's output will attract a new set of negative-value projects. This adverse selection process will erode the ability rents of the inframarginal borrowers. I present an example in which it destroys the market. The results imply that a boom in a sector can lead to a crisis if institutional change to solve the screening problem does not occur.
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| Main Author: | |
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| Format: | Journal Article biblioteca |
| Language: | EN |
| Published: |
2010
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| Subjects: | Asymmetric and Private Information D820, Banks, Other Depository Institutions, Micro Finance Institutions, Mortgages G210, Financing Policy, Financial Risk and Risk Management, Capital and Ownership Structure G320, Entrepreneurship L260, |
| Online Access: | http://hdl.handle.net/10986/5848 |
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| Summary: | n financial markets with asymmetric information about mean returns, borrowers with different default risks may pay the same rate of interest. If they do, the marginal borrower will have a high-risk, negative-value project. Under some conditions, technological change that increases each entrepreneur's output will attract a new set of negative-value projects. This adverse selection process will erode the ability rents of the inframarginal borrowers. I present an example in which it destroys the market. The results imply that a boom in a sector can lead to a crisis if institutional change to solve the screening problem does not occur. |
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