The model of Milgrom and Roberts [1990] focuses on the informational asymmetry between the new rival and the bank from which it borrows.Select one:TrueFalse

The correct answer is True.

The model of Milgrom and Roberts (1990) indeed addresses the issue of informational asymmetry between new entrants (rival firms) and financial institutions (like banks) from which they seek to borrow. In this context, informational asymmetry refers to a situation where one party (the bank) has more or better information than the other party (the new rival).

This asymmetry is crucial in understanding how new firms might be disadvantaged when attempting to secure financing. Banks may not have complete information about the capabilities or reliability of the new rivals, leading to adverse selection where only less creditworthy borrowers are willing to accept the terms offered. This phenomenon can hinder competition and innovation since the lack of access to capital can limit the new entrants' ability to grow or compete effectively in the market.

In summary, Milgrom and Roberts’ model significantly highlights the dynamics that arise from informational asymmetries in the lending process, particularly in the context of new firms entering a market.