Risk Assessment with Asymmetric Information

Abstract

The risk analysis of small business propositions is characterized by uncertainty and asymmetric information, producing problems of moral hazard and adverse selection for the banks and liquidity constraints for entrepreneurs. Decision making is based on information supplied and the application of different criteria. Concerns the relative importance of different criteria and whether the right criteria are being used to assess small firm ventures by banking institutions, and reports the results of research carried out into the importance of different criteria used in risk assessment by bank officers. Finds a high degree of variability in the approach by different bank officers and a bias towards financial information. The findings have marketing implications. Risk assessment cannot be divorced from the nature of the relationship with the small business customer. Investment in improving techniques of risk assessment increases profitability for the bank and improves marketing opportunities through the development of a long‐term working relationship.