Template-Type: ReDIF-Paper 1.0

Author-Name: Johannes Reeder
Author-X-Name-First: Johannes
Author-X-Name-Last: Reeder

Author-Name: Stefanie Trepl
Author-X-Name-First: Stefanie
Author-X-Name-Last: Trepl

Title: Dependent Revenues, Capital Risk and Credit Rationing

Abstract: Much of the literature on financial markets has not dealt with dependency
of project revenues. In a setup similar to the seminal SW
model, we show that the type of equilibrium can crucially depend
on the degree of project dependency. By making aggregate payoffs
risky, households face capital risk. Therefore, risk aversion and households’
consumption-savings decision become very important. Capital
risk deters households from saving so that there might be a credit rationing
equilibrium. Defining the social optimum, we find that project
dependency might reduce the number of safe projects in equilibrium
in a socially harmful way. Thus, project dependency can aggravate
adverse selection. In three extensions, we will show how risk aversion,
imperfect revenue dependency and a different modelling of dependency
influence our results. Our analysis points out that project dependency
is an important factor in the determination of credit market outcomes.
Length:  62 pages
Creation-Date:  2009-08
File-URL: http://www.bgpe.de/texte/DP/078_reeder.pdf
File-Format: Application/pdf
File-Function: First version, 2009
Number: 078
Classification-JEL: 
Keywords: 
Handle: RePEc:bav:wpaper:078_reeder