Competitive equilibrium in the credit market under asymmetric information |
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| Affiliation: | 1. School of Finance, Shandong University of Finance and Economics, and Department of Applied Finance, Macquarie University, Australia;2. School of Economics, Finance and Marketing, RMIT University, Australia;3. Department of Applied Finance, Macquarie University, Australia |
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| 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. |
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