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Asymmetric Information in the Credit Market and Unemployment Benefit as a Screening Device

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  • Francesco Reito

    (Università di Catania)

Abstract

An economy where firms-entrepreneurs are different in terms of unobservable projects' quality is considered. This paper analyzes a case of adverse selection in the credit market when entrepreneurs have no wealth to offer as a collateral. Both pooling and credit rationing are possible equilibria depending on the proportion of good firms in the borrowers' pool. To solve the inefficiencies, different policies are available for the government to implement. If we do not treat the credit market in isolation, it becomes also possible to focus on the labor market. This paper proposes an unemployment benefit to low quality types to encourage them to offer their labor forces rather than asking for a loan.

Suggested Citation

  • Francesco Reito, 2006. "Asymmetric Information in the Credit Market and Unemployment Benefit as a Screening Device," Rivista di Politica Economica, SIPI Spa, vol. 96(5), pages 163-178, September.
    • Handle: RePEc:rpo:ripoec:v:96:y:2006:i:5:p:163-178
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    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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