Endogenous Information Collection: The Study of a Limited Liability Credit Market

16 Pages Posted: 19 Mar 2021 Last revised: 25 Mar 2021

See all articles by Ratul Das Chaudhury

Ratul Das Chaudhury

Monash University; Monash Business School

Sukanta Bhattacharya

University of Calcutta - Department of Economics

Date Written: January 30, 2021

Abstract

We analyze a limited liability credit market where the borrowers need to borrow to implement their chosen projects with uncertain outcome. We allow borrowers to invest in resolution of the uncertainty in the project outcome before implementing the project. Our paper provides a complete characterization of the borrowers’ decision on investment in information for uncertainty resolution and project implementation. We show that the borrowers have more incentive to invest in information at higher rates of interest. If the cost of information goes down a borrower’s incentive to collect information increases. We also show that even a socially motivated lender may decide to charge a relatively high rate of interest and make positive profit under specific parameter values. Although a higher rate of interest induces the borrowers to choose relatively riskier projects.

Keywords: information, individual liability, socially motivated lender, efficient choice.

JEL Classification: C7, G2, N20, O2

Suggested Citation

Das Chaudhury, Ratul and Bhattacharya, Sukanta, Endogenous Information Collection: The Study of a Limited Liability Credit Market (January 30, 2021). Available at SSRN: https://ssrn.com/abstract=3779804 or http://dx.doi.org/10.2139/ssrn.3779804

Ratul Das Chaudhury (Contact Author)

Monash University ( email )

Monash Business School
Clayton, Victoria 3800
Australia

HOME PAGE: http://https://sites.google.com/view/ratul-das-chaudhury

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

Sukanta Bhattacharya

University of Calcutta - Department of Economics ( email )

56A, B.T. Road
Kolkata, 700050
India

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