Co-Signed Loans versus Joint Liability Lending in an Adverse Selection Model
نویسندگان
چکیده
This paper develops an asymmetric information model that provides an economic rational for co-signing. It is shown that banks can solve adverse selection problems by offering a co-signing contract that induces a risky and a safe firm to group together. The equilibrium co-signing debt contract strictly Pareto dominates an equilibrium without a co-signer if the latter entails rationing. The debt contract is such that a safe firm will apply for a joint loan, which will be co-signed by a risky firm. JEL classification: O1, O16, I3 .
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