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Economic Quarterly

Winter 1994

Does Adverse Selection Justify Government Intervention in Loan Markets?

Jeffrey M. Lacker

Some economists argue that models of adverse selection in loan markets can display market failures that rationalize a welfare-enhancing role for government intervention. Such models impose restrictive assumptions on the way agents interact. The same adverse selection models with a less restrictive definition of equilibrium display endogenous financial intermediaries and predict no welfare-enhancing role for the government.

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