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.
CITATION STYLE
Manove, M., & Padilla, A. J. (1999). Banking (Conservatively) with Optimists. The RAND Journal of Economics, 30(2), 324. https://doi.org/10.2307/2556083
Mendeley helps you to discover research relevant for your work.