Working papers

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 imperfect competition. The model has a unique equilibrium in pure strategies, which I characterise in closed form. I apply the model to the credit market and show that decreasing competition, increasing capital requirements or implementing a contractionary monetary policy can lead to Pareto improvements. They alleviate the credit rationing that stems from adverse selection and reduce the maturity or interest rate spread between contracts. The welfare impact of the capital requirement or monetary policies depends on the level of competition and which type of contracts (e.g., long versus short maturity contracts, high versus low Loan-to-Value or loan amount) are mostly affected by the marginal cost change. I discuss how to identify the model parameters using either proprietary data on a single bank or a credit register. 

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

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 of corporate loans.