Competitive equilibrium in the credit market under asymmetric information

David Besanko*, Anjan V. Thakor

*Corresponding author for this work

Research output: Contribution to journalArticle

151 Scopus citations

Abstract

We study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers' default probabilities. Admissible credit contracts are characterized by the credit granting probability, the loan quantity, the loan interest rate and the collateral required. The principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers; moreover, the lower risk borrowers get more credit in equilibrium than they would with full information. No credit is rationed and collateral requirements are higher for the lower risk borrowers.

Original languageEnglish (US)
Pages (from-to)167-182
Number of pages16
JournalJournal of Economic Theory
Volume42
Issue number1
DOIs
StatePublished - Jan 1 1987

ASJC Scopus subject areas

  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Competitive equilibrium in the credit market under asymmetric information'. Together they form a unique fingerprint.

  • Cite this