Attention Allocation and Counter-Cyclical Credit Quality

42 Pages Posted: 15 Mar 2017 Last revised: 23 Nov 2018

See all articles by Mike Mariathasan

Mike Mariathasan

KU Leuven- Faculty of Economics & Business

Sergey Zhuk

University of Vienna

Date Written: November 6, 2018

Abstract

We develop a model of capacity-constrained lenders, who trade off the depth of their loan review with the number of funding applications they process. We find that better economic conditions cause the marginal return to scrutiny to decrease. Lenders therefore process more applications, but approve riskier loans that – paradoxically – generate lower expected returns. Our model rationalises the endogenous deterioration of credit quality during market booms, tighter lending standards during recessions, and counter-cyclical loan underwriting times.

Keywords: credit cycle, lending standards, loan officers, attention allocation, capacity constraints, financial accelerators

JEL Classification: G20, G21, E51

Suggested Citation

Mariathasan, Mike and Zhuk, Sergey, Attention Allocation and Counter-Cyclical Credit Quality (November 6, 2018). Available at SSRN: https://ssrn.com/abstract=2933476 or http://dx.doi.org/10.2139/ssrn.2933476

Mike Mariathasan

KU Leuven- Faculty of Economics & Business ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Sergey Zhuk (Contact Author)

University of Vienna ( email )

Universitätsstrasse 7
Vienna, Vienna 1010
Austria

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