Competitive equilibrium in the credit market under asymmetric information

David Besanko; Anjan V. Thakor

doi:10.1016/0022-0531(87)90108-6

Competitive equilibrium in the credit market under asymmetric information

David Besanko^*, Anjan V. Thakor

^*Corresponding author for this work

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172 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 language	English (US)
Pages (from-to)	167-182
Number of pages	16
Journal	Journal of Economic Theory
Volume	42
Issue number	1
DOIs	https://doi.org/10.1016/0022-0531(87)90108-6
State	Published - Jun 1987

ASJC Scopus subject areas

Economics and Econometrics

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title = "Competitive equilibrium in the credit market under asymmetric information",

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.",

author = "David Besanko and Thakor, {Anjan V.}",

note = "Funding Information: We would like to thank Andrew Weiss, Eungwon Nho, three anonymous referees, and an Associate Editor for suggestions that have been very helpful in improving this paper. David Besanko would like to acknowledge that his reserach was partly supported by a National Science Foundation Grant, SES-8408335. Revisions of this paper were made while Thakor was visiting the Kellogg School, Northwestern University, and while Besanko was visiting Bell Communications Research. Secretarial support of the Banking Research Center at Northwestern University is gratefuly acknowledged.",

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AB - 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.

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Competitive equilibrium in the credit market under asymmetric information

Abstract

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