Learning by Lending, Competition, and Screening Incentives in the Banking Industry

Giovanni Dell and Ariccia#x2019

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: This paper shows that banks may have an incentive to reduce screening when the proportion of untested borrowers on the market increases, leading to a deterioration of their portfolios and a contraction of their profits. The paper addresses the issue in the context of a simple model where banks compete solely on screening and in a more complex model where banks compete by offering borrowers a menu of contracts. The results have policy implications with regard to financial liberalization, lending booms, and banking crises, as those occurred at different times in many emerging markets.

Date: 2000-02
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Citations: View citations in EconPapers (18)

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