Essays in the theory of the credit market under asymmetric information (Ph.D. Thesis)

This thesis investigates how credit markets function under asymmetric information. The use of collateral and the effects of usury laws are explored in greater detail. Following an introduction, the first two chapters explore potential reasons for the use of collateral and evaluate contemporary justifications on the basis of empirical evidence. The thesis develops a model of the credit market in which there exists asymmetric information about the borrowers' risk attitude, and finds that the features of equilibrium are in accordance with empirical evidence. The last two chapters provide theoretical arguments for regulation of interest rates. In certain instances usury laws can improve human welfare where the laissez-faire equilibrium fails due to moral hazard or adverse selection.