Variable Loan Size, Signalling and Endogenous Information

Abstract

In chapter 5 the assumption of an exogenously given project and loan size for each borrower was replaced by the more appealing assumption that the return of the project is a positive, concave function of the loan size according to a conventional neoclassical production function. It turned out that changing from a deterministic to a stochastic world where the project return is a random variable leads to complications which require some restrictions on the random distributions concerned in order to keep the model ‘well behaved’. Then it was shown that even if appropriate assumptions are made no Nash-equi-librium may exist if there is asymmetric information about the abilities of borrowers.