Lending Technologies and Lending Relationships
48 Pages Posted: 5 Jun 2018
Date Written: June 4, 2018
We examine banks' choice between two costly instruments used to identify good loan applicants: direct screening by acquiring borrower-specific information and collateral requirements. We show that with longer relationships the preference for screening increases both in initial and in later periods. Total welfare is enhanced as a result of more efficient selection, and access to credit can be improved. The model explains the reduced incidence of collateral, and potentially higher interest rates in later periods for safer borrowers. The results are stronger under more intense bank competition. Our findings support policies conducive to enduring lending relationships.
Keywords: Collateral, screening, bank relationships
JEL Classification: G21, L13
Suggested Citation: Suggested Citation