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A Note on Credit-Worthiness Tests

Author

Listed:
  • Kirstein, Roland
  • Neunzig, Alexander R.

Abstract

Banks often have to determine the credit worthiness, i.e. the ability to repay the loan, of their customers ex-ante. According to the theory of imperfect diagnosis, it can be rational not to use an informative diagnosis result, even though it can be acquired without costs. We call this non-contingent behavior: The decision whether to grant a loan or not is independent of the diagnosis result. Hence, it can be rational to grant a loan to a particular applicant, even if the specific diagnosis result is negative.

Suggested Citation

  • Kirstein, Roland & Neunzig, Alexander R., 1999. "A Note on Credit-Worthiness Tests," CSLE Discussion Paper Series 99-03, Saarland University, CSLE - Center for the Study of Law and Economics.
  • Handle: RePEc:zbw:csledp:9903
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    File URL: https://www.econstor.eu/bitstream/10419/23103/1/9903note.pdf
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    Cited by:

    1. Kirstein, Roland, 2002. "The new Basle Accord, internal ratings, and the incentives of banks," International Review of Law and Economics, Elsevier, vol. 21(4), pages 393-412, May.

    More about this item

    Keywords

    Diagnosis Theory; Imperfect Decision Making; Adverse Selection; Banks; Credit Rationing;

    JEL classification:

    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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