Inefficiently low screening with Walrasian markets

Abstract

Part of this paper is based on the second chapter of my dissertation at the University of Toronto. I am extremely grateful to Huberto Ennis, Ricardo Reis, and an anonymous referee for many insightful suggestions. Financial support from UVA Darden and from Chicago Booth in prior stages of this work is also gratefully acknowledged. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

A Dynamic Theory of Lending Standards

“…In our analysis, lenders face an adversely selected pool of borrowers when lenders employ tight lending standards, as in the static models of Fishman and Parker (2015) and Bolton, Santos and Scheinkman (2016) in which the strategic complementarity leads to multiple equilibria. Ruckes (2004), Dell'Ariccia and Marquez (2006), and Hachem (2020 analyze static models of lending standards which do not feature a strategic complementarity in lending standards. In Ruckes (2004), lenders simultaneously acquire private information about borrowers and then simultaneously quote loan rates.…”

“…In Dell' Ariccia and Marquez (2006) there is cream skimming by informed lenders but these lenders are endowed with their information. Hachem (2020) studies lending standards in a static model in which banks can also exert search effort to attract potential borrowers. When banks are resource constrained, banks put too much effort into searching for borrowers and too little effort into checking them upon arrival, so that lending standards are inefficiently loose.…”