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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. 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.
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  3. 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.
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  9. Gehrig, Thomas, 1998. "Screening, Cross-Border Banking and the Allocation of Credit," CEPR Discussion Papers 1973, C.E.P.R. Discussion Papers.
  10. 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.
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  13. Thomas Gehrig & Rune Stenbacka, 2003. "Venture Cycles: Theory and Evidence," CESifo Working Paper Series 882, CESifo Group Munich.
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  17. Bolton, Patrick & Farrell, Joseph, 1990. "Decentralization, Duplication, and Delay," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 803-26, August.
  18. Gehrig, Thomas & Stenbacka, Rune, 2001. "Screening Cycles," CEPR Discussion Papers 2915, C.E.P.R. Discussion Papers.
  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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