IDEAS home Printed from
   My bibliography  Save this paper

Lending Efficiency Shocks


  • Tao Zha

    (Federal Reserve Bank of Atlanta)


We use lending-standard data from the surveys of senior loans officers and banks' lending capacity to help identify the mechanism that translates shocks to the efficiency of information acquisition by financial institutions into business cycle fluctuations. Under costly verification, the bank chooses to monitor the returns of those entrepreneurs with insufficient net worth. This choice distorts the allocation of existing capital among entrepreneurs of different sizes. A crucial ingredient of the model is that the outcome of monitoring is endogenous, depending on both the efficiency of monitoring and the resources devoted to verifying the returns of a project. As a consequence, a negative shock to monitoring efficiency forces the bank to increase monitoring intensity and reduce loans for small entrepreneurs. This results in an increase in productivity dispersion and a recession. To validate our model, we use the COMPUSTAT dataset and find a significant countercyclical pattern for the relative capital productivity of small to large firms, and a procyclical capital allocation between small firms and large firms. Along with empirical support from the data on business lending capacity, these empirical findings reinforce the identification of lending efficiency shocks separate from other aggregate shocks as a source of financial frictions.

Suggested Citation

  • Tao Zha, 2015. "Lending Efficiency Shocks," 2015 Meeting Papers 835, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:835

    Download full text from publisher

    File URL:
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    1. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    2. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    3. Rui Castro & Gian Luca Clementi & Yoonsoo Lee, 2008. "Cross-sectoral variation in firm-level idiosyncratic risk," Working Paper 0812, Federal Reserve Bank of Cleveland.
    4. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
    5. Chen, Kaiji & Song, Zheng, 2013. "Financial frictions on capital allocation: A transmission mechanism of TFP fluctuations," Journal of Monetary Economics, Elsevier, vol. 60(6), pages 683-703.
    6. Bachmann, Ruediger & Bayer, Christian, 2009. "Firm-specific productivity risk over the business cycle: facts and aggregate implications," Discussion Paper Series 1: Economic Studies 2009,15, Deutsche Bundesbank.
    7. Stock, James H. & Watson, Mark W., 1999. "Business cycle fluctuations in us macroeconomic time series," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 1, pages 3-64 Elsevier.
    8. Roberto Motto & Massimo Rostagno & Lawrence J. Christiano, 2010. "Financial Factors in Economic Fluctuations," 2010 Meeting Papers 141, Society for Economic Dynamics.
    9. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed015:835. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.