Lending terms and aggregate productivity |
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| Institution: | 1. Instituto de Economía, Pontificia Universidad Católica de Chile, Chile;2. Department of Economics, University of Washington, 305 Savery Hall, Box 353330, Seattle, WA 98195, United States;1. Department of Mathematics, University of Kaiserslautern, Erwin-Schrödinger-Straße, 67663 Kaiserslautern, Germany;2. Department IV – Mathematics, University of Trier, Universitätsring 19, 54296 Trier, Germany;1. School of Mathematics, University of Leeds, United Kingdom;2. Economics, School of Social Sciences, University of Manchester, United Kingdom;3. Department of Finance, NHH–Norwegian School of Economics, Norway;4. Saïd Business School, University of Oxford, United Kingdom;5. Centre for Advanced Studies in Finance, University of Leeds, United Kingdom;1. University of Arkansas, United States;2. Economic Science Institute, Chapman University, United States;3. University of Alaska Anchorage, United States;1. Finance Center Muenster, University of Muenster, Universitätsstr. 14-16, D-48143 Münster, Germany;2. House of Finance, Goethe University Frankfurt, Theodor-W.-Adorno-Platz 3, D-60323 Frankfurt am Main, Germany;3. Oliver Wyman, Friedrich-Ebert-Anlage 49, D-60308 Frankfurt am Main, Germany |
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| Abstract: | Several empirical studies suggest that lending terms are eased in expansions and tightened in recessions, thereby influencing the mix of financed entrepreneurs. We study a model of adverse selection in competitive financial markets and show that lending terms deteriorate with the aggregate state under two general conditions. If exogenous increments to entrepreneurs? productivity raise returns to investment and/or tighten the credit line needed to screen out a given entrepreneur type, competition results in contracts with less screening. Two endogenous effects on productivity emerge. Production scales grow closer to optimal, but lower productivity entrepreneurs enter the mix of producers. The positive (negative) effect dominates at low (high) aggregate states. |
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| Keywords: | Lending terms Credit market frictions Competitive financial markets Adverse selection Productivity |
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