Brian Hillier

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.

The Welfare Implications of Costly Monitoring in Credit Market

Rationing is a pervasive feature of credit markets. It has been suggested that credit rationing represents a suboptimal allocation of resources. In a general equilibrium model of credit rationing with hidden information and costly monitoring we show that if credit is rationed it is suboptimal but that credit should be rationed more tightly. In equilibrium, loan applicants bear average monitoring costs, whereas for efficiency they should bear marginal monitoring costs which are larger because average monitoring costs increase with quantity as extra loans are accompanied by a rise in the interest rate which increases the number of defaults. Copyright 1994 by Royal Economic Society.

The Borrower's Curse: Comment

This paper explores the implications of entrepreneurs holding biased perceptions about the probability of project success and/or the size of payoff, if successful. When entrepreneurs are optimistic only about the probability of success, credit is not rationed. Credit rationing can occur where optimists overestimate payoffs.

The new macroeconomics: Asymmetric information, investment finance and real business cycles

This paper surveys the literature on the role of financial factors in explaining economic fluctuations. We begin by discussing the views of some prominent early macroeconomists and then examine the recent literature on the role of asymmetric information in the market for investment finance. This literature shows that in the presence of informational asymmetries, financial factors may affect real variables like investment and output. In dynamic models real variables may also affect financial factors and may generate persistent effects of shocks even in models which would not display persistence in the absence of the informational asymmetry. Preliminary: Comments welcome.

Equity or Debt? Contracts in Markets with Asymmetric Information

Four cases of a selection problem are examined where knowledge of the distributions from which project returns are drawn is private to entrepreneurs with projects. Diagrammatic analysis is used to determine the contract form offered by funding banks which choose between debt, equity or a more general contract. Two variants of the problem are novel. One new case indicates that some projects will receive equity finance and others debt finance, the other that the choice between debt or equity depends upon the level of the deposit interest rate. The efficiency of the level and composition of investment is examined. Copyright 2000 by Blackwell Publishers Ltd and The Victoria University of Manchester

Some Unpleasant Budgetary Arithmetic of a Proposal to End Inflation: A Comment

A recent paper in thisJouRNAL argued that pegging the price of a new financial instrument offered a way to eliminate inflation (Dowd, I994). The proposal is re-examined in Section I where it is argued that the proposal must be amended if it is to succeed in stabilising the price level. Section II uses a representative agent model to illustrate the arguments of Section I and draws attention to the budgetary implications of the proposal, which implies a resource transfer between the private sector and the government equivalent to a change in tax or expenditure policies. Section III concludes.