Publication: Loan officers' screening with credit scores
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2014-10-01
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Abstract
This paper analyzes the effects of informational asymmetries on screening borrowers. Lenders with access to accurate credit scores offer the most valuable borrowers lower interest rates than lenders with an advantage in costly screening. This cream-skimming induces a negative externality, which reduces the value of investing in screening. This distortion translates into excessive lending with credit scores, too little screening, higher default rates than optimal and credit rationing. The model explains some patterns of loan pricing and defaults, as well as of firm selection by types of lenders, which are consistent with the received empirical evidence.
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Credit scores, Screening, Hard and soft information