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

Arthur Taburet (), Alberto Polo and Quynh-Anh Vo
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Arthur Taburet: Duke’s Fuqua School of Business

No 1057, Bank of England working papers from Bank of England

Abstract: When lenders screen borrowers using a menu of contracts, they generate a contractual externality by making 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 borrowers’ utility, is equivalent to an interest rate increase of 30 basis points (a 15% increase) on all loans.

Keywords: Adverse selection; screening; structural model (search for similar items in EconPapers)
JEL-codes: D82 G21 L13 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2024-02-08
New Economics Papers: this item is included in nep-ban and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1057

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