Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Adverse Selection, Lemons Shocks and Business Cycles
Daisuke Ikeda

Asymmetric information is crucial for understanding the disruption of the supply of credit. This paper studies a dynamic economy featuring asymmetric information and resulting adverse selection in credit markets. Entrepreneurs seek loans from banks for projects, but asymmetric information about entrepreneurs' riskiness causes a lemons problem: relatively safe entrepreneurs do not get funded. An increase in the riskiness of some entrepreneurs raises interest rate spreads, aggravates adverse selection, and shrinks the supply of bank credit. The model calibrated to the U.S. economy generates significant business fluctuations including severe recessions comparable to the Great Recession of 2007-09.

Download Paper
Download Supplement
Cite this item
Daisuke Ikeda, Adverse Selection, Lemons Shocks and Business Cycles, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 361, 01 Apr 2019.
More from this series
JEL Classification:
Subject headings:
Keywords: Adverse selection; Mechanism design approach; separating contract
DOI: 10.24149/gwp361
For corrections, contact Amy Chapman ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal