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Screening using a menu of contracts: a structural model of lending markets

Author

Listed:
  • Taburet, Arthur

    (Duke’s Fuqua School of Business)

  • Polo, Alberto

    (Bank of England)

  • Vo, Quynh-Anh

    (Bank of England)

Abstract

When lenders screen borrowers using a menu of contracts, they generate a contractual externality by making the composition of their competitors’ borrowers worse. Using data from the UK mortgage market and a structural model of screening with endogenous menus, this paper quantifies the impact of asymmetric information on equilibrium contracts and welfare. Counterfactual simulations show that, because of the externality, there is too much screening along the loan to value dimension. The deadweight loss, expressed in borrowers’ utility, is equivalent to an interest rate increase of 30 basis points (a 15% increase) on all loans.

Suggested Citation

  • Taburet, Arthur & Polo, Alberto & Vo, Quynh-Anh, 2024. "Screening using a menu of contracts: a structural model of lending markets," Bank of England working papers 1057, Bank of England.
    • Handle: RePEc:boe:boeewp:1057
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    References listed on IDEAS

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    More about this item

    Keywords

    Adverse selection; screening; structural model;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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