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Segmentation of Information and the Credit Market

Author

Listed:
  • Jaromir Nosal

    (Columbia University)

  • Manolis Galenianos

    (Royal Holloway, University of London)

Abstract

In this paper we examine theoretically and quantitatively the relationship between, on the one hand, the greater ease of risk evaluation and, on the other, the increase in unsecured credit, bankruptcy rates and charge-off rates. Our theoretical model has three key features: borrowers that are heterogeneous with respect to their repayment probability; a lender has to pay an up-front screening cost in order to identify the type of borrower; the market for unsecured credit is segmented by borrower type and imperfectly competitive. These features lead to natural separation of the market into borrowers who have access to unsecured credit and those who do not. We evaluate the quantitative implications of the model in response to progress in screening technology that benefits new entrants relative to incumbent banks.

Suggested Citation

  • Jaromir Nosal & Manolis Galenianos, 2015. "Segmentation of Information and the Credit Market," 2015 Meeting Papers 814, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:814
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    References listed on IDEAS

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    1. Dean F. Amel & Arthur B. Kennickell & Kevin B. Moore, 2008. "Banking market definition: evidence from the Survey of Consumer Finances," Finance and Economics Discussion Series 2008-35, Board of Governors of the Federal Reserve System (U.S.).
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