Job Market Paper: 

       Presented @ Colorado Finance Summit 2022 (Job Market Session) 

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.

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).

Abstract:  Using a discrete choice approach to model competition, I characterise the unique pure strategy Nash equilibrium in a contract theory model with adverse selection and imperfect competition. I highlight a novel contractual externality leading to a welfare trade-off between competition and adverse selection. Lowering competition lowers concerns of losing market shares; this can improve welfare by giving lenders more flexibility on how to use contract terms and prices to sort borrowers efficiently. It also lowers lenders' incentives to implement socially inefficient strategies that rely on taking advantage of their competitors' menus to attract only low-cost borrowers (cream-skimming). However, a low competition level also allows lenders to apply high mark-ups, reducing borrowers' utility. When the externality is high, lowering competition leads to a Pareto improvement.