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

Alberto Polo, Arthur Taburet and Quynh-Anh Vo

Journal of Financial Economics, 2025, vol. 169, issue C

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

Keywords: Menu of contracts; Screening; Structural models (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:169:y:2025:i:c:s0304405x25000649

DOI: 10.1016/j.jfineco.2025.104056

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