Credit Markets with Adverse Selection and Economic Development: Collateral Signalling, Endogeneity of Types, and Government Intervention

Although it is generally accepted that the presence of imperfect information in credit markets distorts the allocation of investment capital in the economy, no agreement has yet been reached in favour of government intervention in such markets to foster economic development. This work uses microeconomic foundations to develop a theoretical framework to illustrate a channel through which adverse selection in credit markets can affect economic growth. Does the lack of collateral can alter the incentives of credit-constrained entrepreneurs to make effort to innovate and to improve their investment projects? Under this model a case for government intervention might exist. However, the intervention might be quite different from those commonly observed in practice. This book is intended for students, researchers and practitioners, with some background in microeconomics, contract theory and game theory, who are interested in studying the rationale for government intervention in credit markets for developmental purposes.