INTERLINKAGE, INVESTMENT AND ADVERSE SELECTION

The paper explores the nature of interlinked contract under adverse selection where agents intertemporal preferences are private information. Our principal findings are: (a) More patient agents (with low rates of time preferences) are offered credit contracts and others are offered share and credit contracts (i.e. interlinked contracts). (b) Interlinkage of contracts reduces investment (c) and is second-best and the non interlinked contracts is first-best.