Corpus ID: 26912945

Co-Signed Loans versus Joint Liability Lending in an Adverse Selection Model

@inproceedings{Gangopadhyay2006CoSignedLV,
  title={Co-Signed Loans versus Joint Liability Lending in an Adverse Selection Model},
  author={S. Gangopadhyay and R. Lensink},
  year={2006}
}
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… CONTINUE READING
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Cosigned vs. group loans
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Essays on asset allocation and diversification
Working Paper No. 35

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