NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Resource Allocation and Inefficiency in the Financial Sector

Kinda Hachem

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

I analyze whether banks are efficient at allocating resources across intermediation activities. Competition between lenders means that resources are needed to draw borrowers into credit matches. At the same time, imperfect information between lenders and borrowers means that resources are also needed for screening. I show that the privately optimal allocation of resources is constrained inefficient. In particular, too many resources are spent on getting rather than vetting borrowers but, once properly vetted, not enough matches are retained. Uninformed lending is thus inefficiently high, informed lending is inefficiently low, and a tax on matching activities helps remedy the situation.

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Document Object Identifier (DOI): 10.3386/w20365

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