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Debt Contracts with Financial Intermediation with Costly Screening

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  • Cheng Wang
  • Stephen D. Williamson

Abstract

The authors develop a credit market model with adverse selection where risk-neutral borrowers self select because lenders make use of a costly screening technology. Equilibrium contracts are debt contracts, and this is robust to randomization, in contrast to results for the costly state verification model. This framework permits optimal financial intermediary structures, in that there is delegated screening in equilibrium if many borrowers are required to fund individual investment projects.

Suggested Citation

  • Cheng Wang & Stephen D. Williamson, 1998. "Debt Contracts with Financial Intermediation with Costly Screening," Canadian Journal of Economics, Canadian Economics Association, vol. 31(3), pages 573-595, August.
    • Handle: RePEc:cje:issued:v:31:y:1998:i:3:p:573-595
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    References listed on IDEAS

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    1. Hyytinen, Ari & Toivanen, Otto, 2000. "Monitoring and market power in loan markets," Research Discussion Papers 9/2000, Bank of Finland.
    2. Karel Janda, 2003. "Credit guarantees in a credit market with adverse selection," Prague Economic Papers, Prague University of Economics and Business, vol. 2003(4), pages 331-349.
    3. Alessandro Fedele & Andrea Mantovani & Francesco Liucci, 2010. "Credit Availability in the crisis: which role for the European Investment Bank Group?," Working Papers 1005, University of Brescia, Department of Economics.
    4. Wai-Hong Ho & Yong Wang, 2005. "Public capital, asymmetric information, and economic growth," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 57-80, February.
    5. Melanie Cao & Shouyong Shi, 2001. "Screening, Bidding, and the Loan Market Tightness," Review of Finance, European Finance Association, vol. 5(1-2), pages 21-61.
    6. Hyytinen, Ari & Toivanen, Otto, 2004. "Monitoring and market power in credit markets," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 269-288, February.
    7. Bose, Arup & Pal, Debashis & Sappington, David E.M., 2012. "Extreme screening policies," European Economic Review, Elsevier, vol. 56(8), pages 1607-1620.
    8. Vauhkonen, Jukka, 2003. "Are adverse selection models of debt robust to changes in market structure?," Research Discussion Papers 28/2003, Bank of Finland.
    9. Gangopadhyay, Shubhashis & Mukhopadhyay, Bappaditya, 2002. "Multiple bank lending and seniority in claims," Journal of Economics and Business, Elsevier, vol. 54(1), pages 7-30.
    10. WaiHong Ho & Yong Wang, 2013. "Asymmetric Information, Auditing Commitment, and Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 611-633, May.
    11. Jeffrey Lacker, 2001. "Collateralized Debt as the Optimal Contract," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 842-859, October.
    12. Keith Blackburn & Niloy Bose & Salvatore Capasso, 2005. "Financial Development, Financing Choice and Economic Growth," Review of Development Economics, Wiley Blackwell, vol. 9(2), pages 135-149, May.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Wai‐Hong Ho & Yong Wang, 2013. "Asymmetric Information, Auditing Commitment, and Economic Growth," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 46(2), pages 611-633, May.
    2. Anthony Yezer & Pingkang Yu, 2016. "Costly Screening, Self-Selection, Fraud, and the Organization of Credit Markets," Working Papers 2016-4, The George Washington University, Institute for International Economic Policy.
    3. Hyytinen, Ari & Toivanen, Otto, 2000. "Monitoring and market power in loan markets," Bank of Finland Research Discussion Papers 9/2000, Bank of Finland.
    4. David Hillier & Beatriz Martínez & Pankaj C. Patel & Julio Pindado & Ignacio Requejo, 2018. "Pound of Flesh? Debt Contract Strictness and Family Firms," Entrepreneurship Theory and Practice, , vol. 42(2), pages 259-282, March.
    5. He, Qichun, 2011. "The impact of the distribution of property rights on inventions on growth: a two-representative-agent model with asymmetric information," MPRA Paper 34450, University Library of Munich, Germany.
    6. Hyytinen, Ari, 2003. "Information production and lending market competition," Journal of Economics and Business, Elsevier, vol. 55(3), pages 233-253.
    7. Gangopadhyay, Shubhashis & Mukhopadhyay, Bappaditya, 2002. "Multiple bank lending and seniority in claims," Journal of Economics and Business, Elsevier, vol. 54(1), pages 7-30.
    8. Hyytinen, Ari & Toivanen, Otto, 2004. "Monitoring and market power in credit markets," International Journal of Industrial Organization, Elsevier, vol. 22(2), pages 269-288, February.
    9. Bossone, Biagio, 2000. "What makes banks special ? a study of banking, finance, and economic development," Policy Research Working Paper Series 2408, The World Bank.
    10. Jeffrey Lacker, 2001. "Collateralized Debt as the Optimal Contract," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 842-859, October.
    11. Vauhkonen, Jukka, 2003. "Are adverse selection models of debt robust to changes in market structure?," Bank of Finland Research Discussion Papers 28/2003, Bank of Finland.
    12. Hyytinen, Ari & Toivanen, Otto, 2000. "Monitoring and market power in loan markets," Research Discussion Papers 9/2000, Bank of Finland.
    13. Jang, Inkee & Kang, Kee-Youn, 2021. "Adverse selection and costly information acquisition in asset markets," Journal of Mathematical Economics, Elsevier, vol. 97(C).
    14. Bose, Arup & Pal, Debashis & Sappington, David E.M., 2012. "Extreme screening policies," European Economic Review, Elsevier, vol. 56(8), pages 1607-1620.
    15. Hyytinen, Ari, 2001. "Information Production, Banking Competition and the Market Structure of the Banking Industry," Discussion Papers 749, The Research Institute of the Finnish Economy.
    16. Karel Janda, 2003. "Credit guarantees in a credit market with adverse selection," Prague Economic Papers, Prague University of Economics and Business, vol. 2003(4), pages 331-349.
    17. Wai‐Hong Ho & Yong Wang, 2005. "Public capital, asymmetric information, and economic growth," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 38(1), pages 57-80, February.
    18. Alessandro Fedele & Andrea Mantovani & Francesco Liucci, 2010. "Credit Availability in the crisis: which role for the European Investment Bank Group?," Working Papers 1005, University of Brescia, Department of Economics.
    19. Stephen D. Williamson, 1998. "Discount Window Lending and Deposit Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 246-275, January.
    20. Juan M. Sánchez, 2018. "The Information Technology Revolution And The Unsecured Credit Market," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 914-930, April.
    21. WaiHong Ho & Yong Wang, 2013. "Asymmetric Information, Auditing Commitment, and Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 611-633, May.
    22. Bernhardt Dan, 2012. "Screening and Financial Contracting in the Face of Outside Competition," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-40, May.
    23. Karel Janda, 2008. "Which Government Interventions Are Good in Alleviating Credit Market Failures?," Working Papers IES 2008/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2008.
    24. Wai-Hong Ho & Yong Wang, 2005. "Public capital, asymmetric information, and economic growth," Canadian Journal of Economics, Canadian Economics Association, vol. 38(1), pages 57-80, February.

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