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Competitive Lending with Partial Knowledge of Loan Repayment: Some Positive and Normative Analysis

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  • WILLIAM A. BROCK
  • CHARLES F. MANSKI

Abstract

We study a credit market where lenders with partial knowledge of repayment use one of several criteria to make lending decisions. Supposing that a public Authority wants to maximize the social return to borrowing, we study interventions that manipulate the return on the safe asset or guarantee a minimum loan return. Manipulating the return on the safe asset is effective if lender beliefs about the return to lending are not too pessimistic relative to those of the Authority. Guaranteeing a minimum return is effective if lender beliefs are not too optimistic relative to those of the Authority.

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  • William A. Brock & Charles F. Manski, 2011. "Competitive Lending with Partial Knowledge of Loan Repayment: Some Positive and Normative Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(2‐3), pages 441-459, March.
    • Handle: RePEc:wly:jmoncb:v:43:y:2011:i:2-3:p:441-459
    DOI: 10.1111/j.1538-4616.2010.00380.x
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    References listed on IDEAS

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    1. Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
    2. Easley, David & O'Hara, Maureen, 2010. "Liquidity and valuation in an uncertain world," Journal of Financial Economics, Elsevier, vol. 97(1), pages 1-11, July.
    3. William A. Brock, 2006. "Profiling Problems With Partially Identified Structure," Economic Journal, Royal Economic Society, vol. 116(515), pages 427-440, November.
    4. Charles F. Manski, 2006. "Search Profiling With Partial Knowledge of Deterrence," Economic Journal, Royal Economic Society, vol. 116(515), pages 385-401, November.
    5. Charles F. Manski, 2009. "The 2009 Lawrence R. Klein Lecture: Diversified Treatment Under Ambiguity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1013-1041, November.
    6. William A. Brock & Charles F. Manski, 2008. "Competitive Lending with Partial Knowledge of Loan Repayment," NBER Working Papers 14378, National Bureau of Economic Research, Inc.
    7. Ricardo J. Caballero & Alp Simsek, 2009. "Complexity and Financial Panics," NBER Working Papers 14997, National Bureau of Economic Research, Inc.
    8. Alan Greenspan, 2004. "Risk and Uncertainty in Monetary Policy," American Economic Review, American Economic Association, vol. 94(2), pages 33-40, May.
    9. Caballero, R J. & Krishnamurthy, A., 2008. "Musical chairs: a comment on the credit crisis," Financial Stability Review, Banque de France, issue 11, pages 9-11, February.
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    Cited by:

    1. Stoye, Jörg, 2012. "Minimax regret treatment choice with covariates or with limited validity of experiments," Journal of Econometrics, Elsevier, vol. 166(1), pages 138-156.
    2. Charles F. Manski, 2014. "Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation," Economic Journal, Royal Economic Society, vol. 0(576), pages 359-376, May.
    3. Cosmin L. Ilut & Martin Schneider, 2022. "Modeling Uncertainty as Ambiguity: a Review," NBER Working Papers 29915, National Bureau of Economic Research, Inc.
    4. Costantini, Mauro & Sousa, Ricardo M., 2022. "What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality," Journal of International Money and Finance, Elsevier, vol. 122(C).
    5. Chollete, Lorán & Jaffee, Dwight & Mamun, Khawaja A., 2022. "Policy suggestions from a simple framework with extreme outcomes," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 374-398.
    6. Tiziana Assenza & William A. Brock & Cars H. Hommes, 2017. "Animal Spirits, Heterogeneous Expectations, And The Amplification And Duration Of Crises," Economic Inquiry, Western Economic Association International, vol. 55(1), pages 542-564, January.

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