Costly Information, Foreign Entry, and Credit Access

Abstract:     
Using a theoretical model that incorporates asymmetric information and differing comparative advantages among lenders, this paper analyzes the impact of lender entry on credit access. The model shows that lender entry has the potential to create a segmented market. This segmentation increases credit access for those firms targeted by the new lenders but potentially reduces credit access for all other firms. The overall impact on net output depends on the distribution of firms, the relative costs of lenders, and the cost of acquiring information. The model provides new insights into the evidence regarding foreign lenders’ entry into emerging markets.

Number of Pages in PDF File: 47

Keywords: Foreign Entry, Asymmetric Information, Economic Development

JEL Classification: D82, F3, G2, O16, O19

working papers series