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We investigate how the degree to which credit markets are centralized affects efficiency when there is asymmetric information. Specifically, we argue that decentralization of credit may promote efficient project selection when creditors are not fully informed ex ante about project quality.
Our starting point is the idea that, although an entrepreneur may have a relatively good idea of her project's quality from the outset, creditors acquire this information only later on, by which time the criteria for profitability may have changed. Thus, a poor project may nevertheless be financed, since a creditor cannot distinguish it at the time from a good project. (en) |
