American Economic Review Vol. 104 No. 12 2014

Reputation and Persistence of Adverse Selection in Secondary Loan Markets

V. V. Chari¹; Ali Shourideh²; Ariel Zetlin-Jones³

¹ Department of Economics, University of Minnesota, 4-101 Hanson Hall, 1925 Fourth Street South, Minneapolis, MN 55455, and Federal Reserve Bank of Minneapolis (e-mail: ) · ² Finance Department, The Wharton School, University of Pennsylvania, 2322 Steinberg-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104 (e-mail: ) · ³ Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213 (e-mail: )

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.

DOI

10.1257/aer.104.12.4027

Volume

104

Issue

12

Pages

4027-4070

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

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