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Decentralized screening: Coordination failure, multiple equilibria and cycles

  • Gehrig, Thomas
  • Stenbacka, Rune

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.

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Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 7 (2011)
Issue (Month): 2 (June)
Pages: 60-69

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Handle: RePEc:eee:finsta:v:7:y:2011:i:2:p:60-69
Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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  1. Thomas Gehrig & Rune Stenbacka, 2003. "Venture Cycles: Theory and Evidence," CESifo Working Paper Series 882, CESifo Group Munich.
  2. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  3. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
  4. Gehrig, Thomas, 1998. "Screening, cross-border banking, and the allocation of credit," Research in Economics, Elsevier, vol. 52(4), pages 387-407, December.
  5. Gehrig, Thomas & Stenbacka, Rune, 2007. "Information sharing and lending market competition with switching costs and poaching," European Economic Review, Elsevier, vol. 51(1), pages 77-99, January.
  6. Suarez,J. & Sussman,O., 1995. "Endogenous Cycles in a Stiglitz-Weiss Economy," Papers 9518, Centro de Estudios Monetarios Y Financieros-.
  7. Martin Ruckes, 2004. "Bank Competition and Credit Standards," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 1073-1102.
  8. Jappelli, Tullio & Pagano, Marco, 2002. "Information sharing, lending and defaults: Cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 26(10), pages 2017-2045, October.
  9. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
  10. Sherrill Shaffer, 1997. "The winner's curse in banking," Working Papers 97-25, Federal Reserve Bank of Philadelphia.
  11. Sah, Raaj Kumar & Stiglitz, Joseph E, 1988. "Committees, Hierarchies and Polyarchies," Economic Journal, Royal Economic Society, vol. 98(391), pages 451-70, June.
  12. Christian Keuschnigg & Søren Bo Nielsen, . "Tax Policy, Venture Capital, and Entrepreneurship," EPRU Working Paper Series 00-18, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  13. Sah, Raaj Kumar & Stiglitz, Joseph E, 1986. "The Architecture of Economic Systems: Hierarchies and Polyarchies," American Economic Review, American Economic Association, vol. 76(4), pages 716-27, September.
  14. Shaffer, Sherrill & Hoover, Scott, 2008. "Endogenous screening, credit crunches, and competition in laxity," Review of Financial Economics, Elsevier, vol. 17(4), pages 296-314, December.
  15. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
  16. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January.
  17. Gehrig, Thomas & Stenbacka, Rune, 2001. "Screening Cycles," CEPR Discussion Papers 2915, C.E.P.R. Discussion Papers.
  18. Alexis Direr, 2008. "Multiple Equilibria in Markets with Screening," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(4), pages 791-798, 06.
  19. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
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