Author: | Manowe, M. Padilla, J. |
Title: | Banking (conservatively) with optimists |
Journal: | RAND Journal of Economics
1999 : SUMMER, VOL. 30:2, p. 324-350 |
Index terms: | BANKING OPTIMIZATION ECONOMICS |
Language: | eng |
Abstract: | Commercial banks frequently encounter optimistic entrepreneurs whose perceptions are biased by wishful thinking. Bankers are left with a difficult screening problem: separating realistic entrepreneurs from optimists who may be clever, knowledgeable, and completely sincere. The authors build a game-theoretic model of the screening process. They show that although entrepreneurs may practice self-restraint to signal realism, competition may lead banks to be insufficiently conservative in their lending, thus reducing capital-market efficiency. |
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