Research
Working papers:
Screening Using a Menu of Contracts: A Structural Model for Lending Markets [Slides], with Alberto Polo and Quynh-Anh Vo
Abstract: When lenders screen borrowers using a menu, they generate a contractual externality by making 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 of a social planner problem 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 30-60 basis points (a 15-30 percent increase) on all loans.
Abstract: I develop a model of screening with menus using a demand system that nests various degrees of competition, from perfect competition to monopoly. I show the existence of a pure strategy Nash equilibrium and characterise it in closed form. I then analyse a contractual externality and build a sufficient statistic to test for its empirical relevance. I also use the model to study credit market policies in the presence of screening. I show that contrary to conventional wisdom, increasing capital requirements, increasing the Federal Reserve rate, or decreasing competition can increase lending. I provide an empirical application in the context of consumer credit and show that, due to the externality, the menus contain too many maturity options. Model parameters are recovered using a linear regression of prices on quantities controlling for contract market shares.
Work in progress:
Markups in the Collateralized Loan Market, with Melina Papoutsi, Daniel Paravisini and Veronica Rappoport, draft coming soon
Abstract: Using data on the universe of European corporate loans, we document a positive relationship between collateral and interest rate after controlling for borrower characteristics. This empirical relationship is consistent with lenders refusing to offer low collateralized loans to riskier borrowers based on characteristics unobservable to the econometrician. Motivated by this stylized fact, we develop a new structural model of lending to get estimates of demand elasticities, marginal cost of lending and collateral recoup rate. Our identification strategy is robust to lenders having private information about borrowers due to, for instance, relationship lending. We find a demand elasticity of 1.7 and low collateral recoup rates (10 percent).
Maturity Markups, with Nuno Clara and Niels Wagner
Abstract: When increasing interest rate is unprofitable because it triggers too much default, lenders can extract borrower surplus by extending the loan's maturity. Traditional empirical industrialization models do not capture this channel. This paper develops a model with endogenous maturity and estimates the interest rates and maturity distortions in the market for car loans.