Paper #1136

Title:

A model of collateral, investment and adverse selection

Author:

Alberto Martin

Date:

January 2009

Abstract:

This paper characterizes the relationship between entrepreneurial wealth and aggregate investment under adverse selection. Its main finding is that such a relationship need not be monotonic. In particular, three results emerge from the analysis: (i) pooling equilibria, in which investment is independent of entrepreneurial wealth, are more likely to arise when entrepreneurial wealth is relatively low; (ii) separating equilibria, in which investment is increasing in entrepreneurial wealth, are most likely to arise when entrepreneurial wealth is relatively high and; (iii) for a given interest rate, an increase in entrepreneurial wealth may generate a discontinuous fall in investment.

Keywords:

Adverse Selection, Collateral, Investment, Lending Standards, Screening

JEL codes:

D82, E44, G10

Area of Research:

Macroeconomics and International Economics

Published in:

Journal of Economic Theory, 144 (4), 2009, 1572-1588.

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