IDEAS home Printed from https://ideas.repec.org/p/red/sed019/1344.html

A Dynamic Theory of Lending Standards

Author

Listed:
  • Michael Fishman

    (Northwestern University)

  • Jonathan Parker

    (MIT)

  • Ludwig Straub

    (Harvard)

Abstract

We develop a dynamic model of credit markets in which both lending standards and the quality composition of the borrower pool are endogenous. Borrowers can be of high or low quality, and each lender privately decides on its lending standard. Lending standards are dynamic strategic complements: tighter screening worsens the future pool of borrowers, increasing the incentive to screen in the future. The market exhibits two steady states, one with loose and one with tight lending standards. Lending standards can inefficiently amplify and propagate temporary deteriorations in fundamentals. We discuss policies that improve on market outcomes, and pitfalls to avoid.

Suggested Citation

  • Michael Fishman & Jonathan Parker & Ludwig Straub, 2019. "A Dynamic Theory of Lending Standards," 2019 Meeting Papers 1344, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1344
    as

    Download full text from publisher

    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2019/paper_1344.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ricci, Lorenzo & Soggia, Giovanni & Trimarchi, Lorenzo, 2023. "The impact of bank lending standards on credit to firms," Journal of Banking & Finance, Elsevier, vol. 152(C).
    2. Toni Ahnert & Martin Kuncl, 2019. "Loan Insurance, Market Liquidity, and Lending Standards," Staff Working Papers 19-47, Bank of Canada.
    3. Hu, Yunzhi, 2022. "A dynamic theory of bank lending, firm entry, and investment fluctuations," Journal of Economic Theory, Elsevier, vol. 204(C).
    4. Farboodi, Maryam & Kondor, Peter, 2023. "Cleansing by tight credit: rational cycles and endogenous lending standards," LSE Research Online Documents on Economics 119226, London School of Economics and Political Science, LSE Library.
    5. Toni Ahnert & Martin Kuncl, 2024. "Government Loan Guarantees, Market Liquidity, and Lending Standards," Management Science, INFORMS, vol. 70(7), pages 4502-4532, July.
    6. Kirti, Divya, 2025. "Lending standards and output growth," Journal of Financial Stability, Elsevier, vol. 76(C).
    7. Robert E. Hall & Marianna Kudlyak, 2022. "Why Has the US Economy Recovered So Consistently from Every Recession in the Past 70 Years?," NBER Macroeconomics Annual, University of Chicago Press, vol. 36(1), pages 1-55.
    8. Ana María Herrera & Raoul Minetti & Matthew Schaffer, 2025. "Financial Liberalization, Credit Market Dynamism, and Allocative Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 57(6), pages 1559-1596, September.
    9. Farboodi, Maryam & Kondor, Péter, 2023. "Cleansing by tight credit: Rational cycles and endogenous lending standards," Journal of Financial Economics, Elsevier, vol. 150(1), pages 46-67.
    10. Hanns Ariho & Benjamin Musiita & Arthur Nuwagaba, 2025. "Monetary Policy Tools and Lending Rates in Uganda: A Quantitative Analysis," Journal of Economics and Behavioral Studies, AMH International, vol. 17(2), pages 68-80.
    11. Hachem, Kinda, 2021. "Inefficiently low screening with Walrasian markets," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 935-948.
    12. Ewa Wróbel, 2022. "What drives bank lending policy? The evidence from bank lending survey for Poland," NBP Working Papers 352, Narodowy Bank Polski.
    13. Maryam Farboodi & Péter Kondor, 2020. "Rational Sentiments and Economic Cycles," NBER Working Papers 27472, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    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:sed019:1344. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Christian Zimmermann (email available below). General contact details of provider: https://edirc.repec.org/data/sedddea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.