Banking (Conservatively) with Optimists

  • Manove M
  • Padilla A
  • 26

    Readers

    Mendeley users who have this article in their library.
  • 61

    Citations

    Citations of this article.

Abstract

Commercial banks frequently encounter optimistic entrepreneurs whose perceptions are biased by wishful thinking. Bankers are left with a difficult screening problem: separating realistic entrepreneurs from optimists who may be clever, knowledgeable, and completely sincere. We build a game-theoretic model of the screening process. We show that although entrepreneurs may practice self-restraint to signal realism, competition may lead banks to be insufficiently conservative in their lending, thus reducing capital-market efficiency. High collateral requirements decrease efficiency further. We discuss bank regulation and bankruptcy rules in connection with the problems that optimistic entrepreneurs present.

Get free article suggestions today

Mendeley saves you time finding and organizing research

Sign up here
Already have an account ?Sign in

Find this document

Authors

  • Michael Manove

  • A. Jorge Padilla

Cite this document

Choose a citation style from the tabs below

Save time finding and organizing research with Mendeley

Sign up for free