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Endogenous screening, credit crunches, and competition in laxity
Author(s) -
Shaffer Sherrill,
Hoover Scott
Publication year - 2008
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2007.09.001
Subject(s) - economics , recession , competition (biology) , monetary economics , interest rate , great recession , information asymmetry , microeconomics , macroeconomics , labour economics , ecology , biology
Abstract A simple model of lending with endogenous screening predicts that risk‐neutral banks tend to adopt tighter lending standards under several conditions commonly seen in recessions: lower interest rates (or spreads), higher default rates, or a smaller fraction of good borrowers. Historical data support these predictions. In addition, better information about borrower types encourages tighter lending standards, and competition in laxity can arise with multiple banks. Within the class of symmetric screening decisions, endogenizing the interest rates disrupts the existence of equilibrium in pure strategies, just as when screening decisions are assumed to be exogenous.