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Competitive Lending with Partial Knowledge of Loan Repayment: Some Positive and Normative Analysis

Authors


  • Brock's research was supported in part by National Science Foundation grant SES-0518274 and by the Vilas Trust. Manski's research was supported in part by National Science Foundation grant SES-0911181. We have benefited from the opportunity to present this work in a seminar at the Federal Reserve Bank of Chicago, at the June 2008 conference on Bayes Savaged in the Extreme, Norwegian School of Economics and Business Administration, and at the March 2009 conference on Housing, Debt and Financial Market Expectations, Judge Business School, University of Cambridge. We are grateful for comments from Gadi Barlevy and an anonymous referee.

Abstract

We study a credit market where lenders with partial knowledge of repayment use one of several criteria to make lending decisions. Supposing that a public Authority wants to maximize the social return to borrowing, we study interventions that manipulate the return on the safe asset or guarantee a minimum loan return. Manipulating the return on the safe asset is effective if lender beliefs about the return to lending are not too pessimistic relative to those of the Authority. Guaranteeing a minimum return is effective if lender beliefs are not too optimistic relative to those of the Authority.

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