Inefficiently Low Screening with Walrasian Markets

83 Pages Posted: 11 Aug 2014 Last revised: 23 Feb 2023

See all articles by Kinda Hachem

Kinda Hachem

University of Chicago - Booth School of Business

Date Written: August 2014

Abstract

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.

Suggested Citation

Hachem, Kinda, Inefficiently Low Screening with Walrasian Markets (August 2014). NBER Working Paper No. w20365, Available at SSRN: https://ssrn.com/abstract=2478529

Kinda Hachem (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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