Segmentation of Information and the Credit Market

Jaromir Nosal and Manolis Galenianos

No 814, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we examine theoretically and quantitatively the relationship between, on the one hand, the greater ease of risk evaluation and, on the other, the increase in unsecured credit, bankruptcy rates and charge-off rates. Our theoretical model has three key features: borrowers that are heterogeneous with respect to their repayment probability; a lender has to pay an up-front screening cost in order to identify the type of borrower; the market for unsecured credit is segmented by borrower type and imperfectly competitive. These features lead to natural separation of the market into borrowers who have access to unsecured credit and those who do not. We evaluate the quantitative implications of the model in response to progress in screening technology that benefits new entrants relative to incumbent banks.

Date: 2015
New Economics Papers: this item is included in nep-dge
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:814

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