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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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  19. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
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