IDEAS home Printed from https://ideas.repec.org/a/bpj/rneart/v21y2022i3p111-142n1.html
   My bibliography  Save this article

Monopolistic Screening Under Mental Accounting: Applications to Loan Markets with Collateral

Author

Listed:
  • Kim Byung-Cheol

    (Department of Economics, Finance and Legal Studies, Culverhouse College of Business, University of Alabama, 200 Alston Hall, Tuscaloosa, AL 35487, USA)

Abstract

This paper extends the standard model of monopolistic screening to allow for some consumers who engage in narrow framing, a prominent behavioral bias of mental accounting. Narrow framing generates a bias toward high quality-price ratios, which induces even high-type consumers to choose a menu that targets low-type consumers. To strategically account for narrow framing, when the monopolist induces the high-type consumers to stay with the more expensive menu, there arises a downward quality distortion even at the top and a smaller downward distortion at the bottom. Then, we apply this model to optimal loan contracts to screen heterogeneous borrowers with different default risks. We find that the lender optimally reduces the collateral requirement for low-risk borrowers when some high-risk borrowers are subject to narrow framing. This result empirically implies that narrow framing may lead to smaller credit rationing and lower monitoring intensity in the lending markets.

Suggested Citation

  • Kim Byung-Cheol, 2022. "Monopolistic Screening Under Mental Accounting: Applications to Loan Markets with Collateral," Review of Network Economics, De Gruyter, vol. 21(3), pages 111-142, October.
    • Handle: RePEc:bpj:rneart:v:21:y:2022:i:3:p:111-142:n:1
    DOI: 10.1515/rne-2023-0030
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/rne-2023-0030
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/rne-2023-0030?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    adverse selection; behavioral contract theory; collateral; narrow framing; non-linear price discrimination;
    All these keywords.

    JEL classification:

    • A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • G4 - Financial Economics - - Behavioral Finance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:rneart:v:21:y:2022:i:3:p:111-142:n:1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyter.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.