Reputation and persistence of adverse selection in secondary loan markets?

V. V. Chari, Ali Shourideh, Ariel Zetlin-Jones

Research output: Contribution to journalArticlepeer-review

24 Scopus citations


The volume of new issuances in secondary loan markets fluctuates over time and falls when collateral values fall. We develop a model with adverse selection and reputation that is consistent with such fluctuations. Adverse selection ensures that the volume of trade falls when collateral values fall. Without reputation, the equilibrium has separation, adverse selection is quickly resolved, and trade volume is independent of collateral value. With reputation, the equilibrium has pooling and adverse selection persists over time. The equilibrium is efficient unless collateral values are low and originators' reputational levels are low. We describe policies that can implement efficient outcomes.

Original languageEnglish (US)
Pages (from-to)3885-3920
Number of pages36
JournalAmerican Economic Review
Issue number12
StatePublished - Dec 1 2014


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