ACMI · Aggregate implications of asymmetric information in credit markets
FP6 — Marie Curie Actions (Human Resources and Mobility)
- Duration
- 2005-09-01 → 2007-08-31
- EU contribution
- €142,866
- Participants
- 1
- Scheme
- EIF
Lines connect the coordinator with its partners.
Results in brief
Final Activity Report Summary - ACMI (Aggregate implications of asymmetric information in credit markets)
The project developed the theoretical analysis of financial markets where intermediaries strategically compete over the contract offers they make to consumers/entrepreneneurs. Our research has mainly been focused on markets where financial contracts are non-exclusive: every single agent is allowed to trade with several intermediaries at a time, and her decisions cannot be contracted upon. Overall, we have provided new results for the analysis of these markets, both on the positive and on the normative side. Indeed, competition in non-exclusive financial markets typically delivers non-competitive results, in the form of positive extra-profits for the active intermediaries and of a distorted distribution of surplus. Our research has made several advances in the characterisation of the corresponding equilibrium allocations as well as in the Welfare analysis. In particular, we have concentrated our attention on those situations where the social planner cannot directly enforce exclusivity clauses. That is, the strategic behaviour of intermediaries becomes a constraint for the planner. The analysis of competition over contracts under asymmetric information is typically studied as a mechanism design game between several principals. Joining this perspective, our research also provided new results on the theoretical properties of these games. In particular, we contributed to clarify under which conditions it is possible to restrict the number of instruments available to competitors without any loss of generality. Our investigation constitutes the first step of a broader research agenda, where we plan to properly investigate the macroeconomic implications of competition in non-exclusive markets. We believe that there is room for a theoretical representation of the relationship between the real and the financial sector which is based on the structure of financial contracts.
Data: CORDIS, © European Union
Project objective
This project aims at exploring the macroeconomic implications of agents' behaviours in credit markets where information is not perfectly distributed. Many recent studies emphasized the relationship between asymmetric information in loan relationships and aggregate outcomes. These researches share the conviction that the way in which entrepreneurs decide to finance their production activities, interact with financial institutions, and define contractual agreements is a relevant source of economic inefficiencies a s well as a major cause of business fluctuations.Our main target is to contribute to these studies introducing a formal mechanism design analysis of lender-borrower relationships. We plan to develop two main lines of investigation. First, we will emphasize the role of credit market imperfections in macroeconomic models where agents are allowed to choose their optimal financial arrangements. As a consequence, asymmetric information in the credit market can be responsible for the existence of business fluctuations and, at the same time, fluctuations can influence the nature of firms' financing over time. This intuition might provide important extensions of traditional Corporate Finance theories that relate firms' capital structure only to the characteristics of agency costs under asymmetric information. Second, we will focus on the analysis of credit markets where multiple lenders are strategically competing over their contract offers to entrepreneurs/borrowers.Emphasis will be given to the construction of theoretical schemes that enable to characterize the relevant credit market equilibria and to understand their efficiency properties. If asymmetric information is a persistent feature of credit relationships, then market equilibria may fail to achieve even Pareto-constrained efficiency. Our research will try to develop a welfare-based foundation for policy interventions in market economies with incentive problems.
Original text from CORDIS.
Participants
- INSTITUT D'ECONOMIE INDUSTRIELLE · TOULOUSECoordinatorFrance
Links
Data: CORDIS, © European Union