Sequential credit markets

Axelson, Ulf ORCID: 0000-0002-1265-2714 and Makarov, Igor ORCID: 0009-0006-7557-449X (2026) Sequential credit markets. Journal of Financial Economics, 176. ISSN 0304-405X (In Press)

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Abstract

Entrepreneurs typically seek financing in decentralized markets, where they approach investors sequentially. We develop a model of sequential capital markets with privately informed investors. The sequential market creates a dynamic adverse selection externality that leads to overinvestment and excessive rents to intermediaries, even as the number of competing investors becomes arbitrary large. The resulting rents lead to excessive entry of investors and insufficient entry of entrepreneurs. Moving to a centralized market structure or reducing transparency restores competitiveness but may harm efficiency. The model also explains how even a small skill advantage for an investor can lead to preferential deal flow and outsized returns.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	01 Dec 2025 17:45
Last Modified:	29 Dec 2025 18:03
URI:	http://eprints.lse.ac.uk/id/eprint/130383

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