Reputation and Persistence of Adverse Selection in Secondary Loan Markets
V. V. Chari, Ali Shourideh, Ariel Zetlin-Jones
American Economic Review · 2014 · Volume 104 · Issue 12
Abstract
The volume of new issuances in secondary loan markets fluctuates over time and falls when collateral values fall. We develop a model with adverse selection and reputation that is consistent with such fluctuations. Adverse selection ensures that the volume of trade falls when collateral values fall. Without reputation, the equilibrium has separation, adverse selection is quickly resolved, and trade volume is independent of collateral value. With reputation, the equilibrium has pooling and adverse selection persists over time. The equilibrium is efficient unless collateral values are low and originators' reputational levels are low. We describe policies that can implement efficient outcomes. (JEL D82, G11, G21, G28)
Keywords
Asymmetric and Private Information, Mechanism Design, Portfolio Choice, Investment Decisions, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Financial Institutions and Services: Government Policy and Regulation
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