Asimmetric information in credit markets and a reseacrh related to the problem`s solution

Ill ABSTRACT The theory of markets with asymmetric information has been a vital and lively field of economic research for a long time. The models with imperfect information are the subjects that researchers have been focused on. In credit markets, informational asymmetries are particularly pronounced. In this market, banks are the lenders, individuals and firms are the borrowers. Lenders are believed to be not always in a position to know the true state of their borrowers and/or borrowers' quality of investment projects although lenders would benefit from knowing the true characteristics of borrowers. But moral hazard hampers the direct transfer of information between market participants. That is why differentiation of honest and dishonest borrowers is important. Asymmetric information in credit markets may lead to market failure and has macro economic effects as a whole. In this study, we explore how asymmetric information and uncertainty can lead to failure in markets and how to overcome these problems. More specifically, how lenders deal with borrowers and the problems related to adverse selection and moral hazard in credit markets is discussed. Besides, a comparison takes place between the theory and practice according to interviews with two private and two government banks. At last, there are some suggestions to solve asymmetric information problem in the light of the literature and findings.