Article ID Journal Published Year Pages File Type
5067672 European Economic Review 2008 27 Pages PDF
Abstract

We consider a closed economy where a risk neutral bank competes with a competitive bond market. Firms can finance a risky project either by a bank credit or by issuing a bond which is directly sold to risk averse investors who also hold safe deposits at the bank. We show that the bank tends to allocate more capital to lower quality projects but there are some interesting qualifications. If the asymmetric information concerns only the success probability, then we observe adverse selection while if it concerns only the expected return, bad types are driven out of the market.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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