The Performance of Credit Markets under Asymmetric Information about Project Means and Variances

Generalizes existing models of credit markets under asymmetric information. The general model accommodates the adverse selection arguments of Stiglitz and Weiss and the favourable selection arguments of de Meza and Webb, and contains their models as special cases. Market equilibrium may exhibit credit rationing, while aggregate investment may be above or below the first-best level. A novel issue presented is that inefficiencies may involve not merely the volume of investment but also its composition.