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Costly Information Production Equilibria in the Bank Credit Market with Applications to Credit Rationing

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  • Thakor, Anjan V.
  • Callaway, Richard

Abstract

In this paper, we explore the nature of equilibria in an asymmetrically informed bank credit market in which credit applicants know their own (intrinsic) default risks, but potential lenders can discover these default risks only by expending resources to produce information. The resolution of informational asymmetries in the capital market is, in the contemporary view, considered a very important function served by financial intermediaries like commercial banks and, in the opinion of some, even the primary justification for their existence [17]. We, therefore, focus on how the presence of asymmetric information—in particular, the response of (expected) profit-maximizing banks to it—affects the equilibrium prices and quantities of credit offered in the banking system.

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  • Thakor, Anjan V. & Callaway, Richard, 1983. "Costly Information Production Equilibria in the Bank Credit Market with Applications to Credit Rationing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(2), pages 229-256, June.
    • Handle: RePEc:cup:jfinqa:v:18:y:1983:i:02:p:229-256_01
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    3. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June.
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    6. Nabi, Mahmoud Sami & Ben Souissi, Souraya, 2011. "Could dishonest banks be disciplined ?," MPRA Paper 32010, University Library of Munich, Germany.

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