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Extreme screening policies

Author

Listed:
  • Bose, Arup
  • Pal, Debashis
  • Sappington, David E.M.

Abstract

We show that a lender often experiences increasing marginal returns to screening in a standard setting where the lender decides how intensively to screen the projects of prospective borrowers. The increasing marginal returns imply that even small changes in industry parameters can produce large changes in equilibrium screening intensity. In particular, a small reduction in the expected return from borrowers' projects can produce a pronounced increase in the screening of prospective borrowers, with substantial corresponding welfare effects.

Suggested Citation

  • Bose, Arup & Pal, Debashis & Sappington, David E.M., 2012. "Extreme screening policies," European Economic Review, Elsevier, vol. 56(8), pages 1607-1620.
  • Handle: RePEc:eee:eecrev:v:56:y:2012:i:8:p:1607-1620 DOI: 10.1016/j.euroecorev.2012.09.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Screening; Adverse selection; Lending policies;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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