A NOTE ON CREDIT MARKET DEVELOPMENT AND HUMAN CAPITAL ACCUMULATION

Abstract

This paper explores the interplay between credit market development and human capital accumulation in a two-period overlapping-generations economy with asymmetric information under the assumption that young lenders channel credits to young borrowers and acquire education. We find that, at the self-selection equilibrium, lenders will allocate more time to acquire education if the cost of screening borrowers falls. Furthermore, a longer duration of lenders' schooling time suppresses borrowers' incentive to cheat thereby enabling lenders to screen less frequently. Our preliminary cross-country empirical analysis appears to support these findings.