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Sequential credit markets

Ulf Axelson; Igor Makarov

London School of Economics and Political Science

Entrepreneurs typically seek financing in decentralized markets, where they approach investors sequentially. We develop a model of sequential capital markets with privately informed investors. The sequential market creates a dynamic adverse selection externality that leads to overinvestment and excessive rents to intermediaries, even as the number of competing investors becomes arbitrary large. The resulting rents lead to excessive entry of investors and insufficient entry of entrepreneurs. Moving to a centralized market structure or reducing transparency restores competitiveness but may harm efficiency. The model also explains how even a small skill advantage for an investor can lead to preferential deal flow and outsized returns.

DOI

10.1016/j.jfineco.2025.104216

Volume

176

Pages

104216

Language

en

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BibTeX

Sources

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