Reputation and Persistence of Adverse Selection in Secondary Loan Markets

The volume of new issuances in secondary loan markets fluctuates over time and falls when collateral values fall. We develop a model with adverse selection and reputation that is consistent with such uctuations. Adverse selection ensures that the volumeof trade falls when collateral values fall. Without reputation, the equilibrium has separation, adverse selection is quickly resolved, and trade volume is independent of collateral value. With reputation, the equilibrium has pooling and adverse selection persists over time. The equilibrium is ecient unless collateral values are low and originators’ reputational levels are low. We describe policies that can implement ecient outcomes.