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Decentralized screening: Coordination failure, multiple equilibria and cycles

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  • Gehrig, Thomas
  • Stenbacka, Rune

Abstract

We explore the inter-temporal effects of the pool externalities caused by imperfect screening in competitive credit markets. We find that imperfect screening may, depending on the parameters of the model, generate excessive screening, inefficient duplication of screening or screening cycles. Whenever screening cycles occur they are manifestations of either socially excessive or insufficient screening. We present a full equilibrium characterization and a welfare analysis. The implementation of socially optimal lending decisions requires communication across lenders (i.e. information sharing), which decentralized markets typically cannot achieve.

Suggested Citation

  • Gehrig, Thomas & Stenbacka, Rune, 2011. "Decentralized screening: Coordination failure, multiple equilibria and cycles," Journal of Financial Stability, Elsevier, vol. 7(2), pages 60-69, June.
  • Handle: RePEc:eee:finsta:v:7:y:2011:i:2:p:60-69
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Kinda Hachem, 2014. "Resource Allocation and Inefficiency in the Financial Sector," NBER Working Papers 20365, National Bureau of Economic Research, Inc.
    2. Gehrig, Thomas & Stenbacka, Rune, 2017. "Journal Competition and the Quality of Published Research: Simultaneous versus Sequential Screening," CEPR Discussion Papers 12065, C.E.P.R. Discussion Papers.
    3. Bester, Helmut & Gehrig, Thomas & Stenbacka, Rune, 2012. "Loan Sales and Screening Incentives," CEPR Discussion Papers 9084, C.E.P.R. Discussion Papers.
    4. Marcela Eslava & Javier Freixas, 2016. "Public Development Banks and Credit Market Imperfections," DOCUMENTOS CEDE 014234, UNIVERSIDAD DE LOS ANDES-CEDE.

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