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Credit Markets Assignment | Homework For You

30. In credit markets with asymmetric information: a) Lenders may formulate sets of incentive compatible contracts that consider collateral and interest rates simultaneously as a mechanism to reveal the borrower’s ex ante risk level. b) By offering two incentive compatible contracts, lower risk borrowers mainly choose contracts with higher collateral and lower interest rates. c) Relationship lending would improve banks’ information on firms and their …

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