Multiple borrowing and adverse selection in credit markets

An entrepreneur planning a risky expansion of his small business project may prefer to fund the expansion by soliciting several loans from different lenders. While this is inefficient due to the duplication of screening and monitoring costs, it works to the entrepreneur’s advantage if he can lower h...

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Published in:Oxford economic papers 2018-01, Vol.70 (1), p.286-299
Main Author: Van Tassel, Eric
Format: Article
Language:English
Subjects:
Adverse selection
Bond markets
Borrowing
Credit
Entrepreneurs
Interest rates
Loans
Small business
Soliciting
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description An entrepreneur planning a risky expansion of his small business project may prefer to fund the expansion by soliciting several loans from different lenders. While this is inefficient due to the duplication of screening and monitoring costs, it works to the entrepreneur’s advantage if he can lower his risk premium. When entrepreneurs are able to take out multiple loans in equilibrium, it takes place within a pooling contract, characterized by cross-subsidization. This kind of borrowing in the credit market leads to high interest rates and, in some cases, market failure due to adverse selection.
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source International Bibliography of the Social Sciences (IBSS); JSTOR Archival Journals and Primary Sources Collection; Oxford Journals Online; EBSCO_EconLit with Full Text（美国经济学会全文数据库）
subjects Adverse selection
Bond markets
Borrowing
Credit
Entrepreneurs
Interest rates
Loans
Small business
Soliciting
title Multiple borrowing and adverse selection in credit markets
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