Citation

Discussion Paper Details

Please find the details for DP1631 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Adverse Selection of Investment Projects and the Business Cycle

Author(s): Pietro Reichlin and Paolo Siconolfi

Publication Date: August 1997

Keyword(s): Adverse Selection, Business Cycle and Financial Intermediation

Programme Area(s): International Macroeconomics

Abstract: In an economy where entrepreneurs with unequal ?abilities? face alternative investment projects, which differ in their degree of risk and productivity, we analyse the Nash equilibrium contracts arising from a banks-borrowers game in the context of asymmetric information. We show that, for a particular characterization of the game, one can determine the endogenous distribution of projects and the ?type? of contracts (pooling or separating) as functions of the amount of loanable funds. We then apply this game to a general equilibrium aggregative economy with production, populated by overlapping generations of borrowers and lenders. We show that, for a range of parameter values, equilibria are characterized by persistent endogenous cycles.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1631

Bibliographic Reference

Reichlin, P and Siconolfi, P. 1997. 'Adverse Selection of Investment Projects and the Business Cycle'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1631