Competitive Search Equilibrium in the Credit Market under Asymmetric Information and Limited Commitment

Abstract

This paper develops a model of a competitive search credit market under hidden information and limited commitment. Using the model, it provides a theoretical account that links time delays and costs in financial intermediation as well as lack of collateral to the distribution of credit supply and interest rate spreads. The link sheds light on and explains the possibility of pure credit rationing due to the credit frictions. This paper also demonstrates the possibility of contract dispersion among homogeneous borrowers.