Macroeconomics, 2nd Edition by Pearson

FINANCIAL SECTOR REFORMS

387

asymmetric information is less than the interest rate a bad borrower would

have been charged if it were possible to identify borrower types,

i



(

i

mc

/

p

b

)

Hence,

i

mc

___

p

g

=

i

g



i



i

b

=

i

mc

___

p

b

The uniform interest rate, therefore, overcharges good borrowers (

i

g



i

) and

undercharges bad borrowers (

i



i

b

). The lender will then deter good borrowers

from taking loans and will attract bad borrowers. As a result, the lender’s pool

of borrowers will not be drawn randomly from the population distribution of

borrowers and with more than a fraction ( l ...