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Screening using a menu of contracts: A structural model for lending markets

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  • Polo, Alberto
  • Taburet, Arthur
  • Vo, Quynh-Anh

Abstract

When lenders screen borrowers using a menu, they generate a contractual externality by rendering the composition of their competitors’ borrowers worse. Using data from the UK mortgage market and a structural model of screening with endogenous menus, this paper quantifies the impact of asymmetric information on equilibrium contracts and welfare. Counterfactual simulations show that, because of the externality, there is too much screening along the loan-to-value dimension. The deadweight loss, expressed in borrower utility, is equivalent to an interest rate increase of 30 basis points (a 15% increase) on all loans.

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  • Polo, Alberto & Taburet, Arthur & Vo, Quynh-Anh, 2025. "Screening using a menu of contracts: A structural model for lending markets," Journal of Financial Economics, Elsevier, vol. 169(C).
    • Handle: RePEc:eee:jfinec:v:169:y:2025:i:c:s0304405x25000649
    DOI: 10.1016/j.jfineco.2025.104056
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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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