Credit markets under asymmetric information regarding the law
J-P. Niinimaki  1@  
1 : Turku School of Economics, University of Turku

This theoretical paper shows that asymmetric information regarding the law generates credit rationing, underinvestment and overinvestment problems. In contrast to the standard form of asymmetric information, these problems cannot be eliminated using loan collateral or personal guarantees. It is optimal to establish a centralized financial intermediary, a bank, which procures legal expertise and evaluates legal risks on behalf of depositors who lack this legal expertise. The bank provides fundamental asset transformation services to the economy by transforming complex loans (requiring legal expertise) into simple deposits (which do not require legal expertise).

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