A1 Refereed original research article in a scientific journal

Credit markets under asymmetric information regarding the law




AuthorsNiinimäki J.

PublisherElsevier Inc.

Publication year2019

JournalNorth American Journal of Economics and Finance

Journal name in sourceNorth American Journal of Economics and Finance

Volume47

First page 380

Last page390

Number of pages11

ISSN1062-9408

eISSN1879-0860

DOIhttps://doi.org/10.1016/j.najef.2018.05.003


Abstract

This theoretical paper shows that asymmetric information regarding the law generates the same problems as the standard form of asymmetric information: credit rationing, underinvestment, and overinvestment. Collateral or personal guarantees eliminate these problems efficiently under the standard form of asymmetric information, but they are rather inefficient under asymmetric information regarding the law. It is optimal to create a centralized financial intermediary, a bank, which procures legal expertise and evaluates the legal risks on behalf of depositors who lack this legal expertise. The bank provides fundamental asset transformation services to the economy by transforming complex loans (requiring legal expertise) into simple deposits (which do not require legal expertise).



Last updated on 2024-26-11 at 22:22