Reputation and Persistence of Adverse Selection in Secondary Loan Markets

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....

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Bibliographic Details
Published inThe American economic review Vol. 104; no. 12; pp. 4027 - 4070
Main Authors Chari, V. V., Shourideh, Ali, Zetlin-Jones, Ariel
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.12.2014
Subjects
Adverse selection
Allocative efficiency
Asset acquisitions
Asymmetry
Bank earnings
Bank loans
Bank portfolios
Banks
Bond issues
Business reputation
Central banks
Collateral
Economic fluctuations
Economics
Equilibrium
Loans
Market equilibrium
Mortgage loans
Participating loans
Reputations
Secondary markets
Studies
Trade
Trade volume
Values
United States > US
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Summary: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.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.104.12.4027