A Dynamic Theory of Lending Standards

Michael Fishman, Jonathan Parker and Ludwig Straub
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Michael Fishman: Northwestern University

No 1344, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a dynamic model of credit markets in which both lending standards and the quality composition of the borrower pool are endogenous. Borrowers can be of high or low quality, and each lender privately decides on its lending standard. Lending standards are dynamic strategic complements: tighter screening worsens the future pool of borrowers, increasing the incentive to screen in the future. The market exhibits two steady states, one with loose and one with tight lending standards. Lending standards can inefficiently amplify and propagate temporary deteriorations in fundamentals. We discuss policies that improve on market outcomes, and pitfalls to avoid.

Date: 2019
New Economics Papers: this item is included in nep-com, nep-dge and nep-mic
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Related works:
Journal Article: A Dynamic Theory of Lending Standards (2024)
Working Paper: A Dynamic Theory of Lending Standards (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1344

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