NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Inefficiently Low Screening with Walrasian Markets

Kinda Hachem

NBER Working Paper No. 20365
Issued in August 2014, Revised in May 2020
NBER Program(s):Corporate Finance, Economic Fluctuations and Growth, Monetary Economics

Financial intermediaries devote resources to finding and screening borrowers before lending capital. By retaining only sufficiently good matches, informed lenders exacerbate adverse selection problems for others lending in the same market. Failure to internalize this implies that informed lenders are too selective in the matches they retain. The resulting under-use of capital pushes the cost of capital down, decreasing the benefit of being informed rather than uninformed and prompting a reallocation of resources from screening to matching. Compared to the constrained efficient allocation, the decentralized equilibrium has too little screening, too little informed credit, and too much uninformed credit.

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Document Object Identifier (DOI): 10.3386/w20365

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