Ex-ante Asymmetric Information in Credit Markets and Macroeconomic Fluctuations
Ture, Hatice Elif
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This dissertation analyzes macroeconomic effects of ex-ante information acquisition problems between lenders and borrowers in credit markets. It examines the ways in which the costs associated with the screening of privately informed heterogeneous borrowers affect contractual arrangements, efficient allocation of credit and macroeconomic fluctuations. In the first chapter, screening can be achieved by collateral requirements and credit limits. We analyze how changes in collateral availability affect aggregate investment and output dynamics through the misallocation of credit across heterogeneous investors. Groups of investors with different observable quality finance investment projects through bank loans, pledging part of their projects. Borrower risk is private information within a group, which requires financial contracts that may pool or separate borrowers with common quality. Pooling contracts offer efficient loan amounts but entail cross subsidization of high-risk borrowers, while separating contracts offer efficient loan rates but entail credit rationing of low-risk borrowers. A financial shock that reduces the collateral capacity of investors may switch the financial contracts designed for low-quality investors from pooling to separating, which increases credit rationing and reallocates credit in favor of high-quality investors. This flight to quality in bank lending reduces aggregate investment efficiency and real economic activity. In the second chapter, screening can be achieved by incurring resource costs. We build a dynamic model featuring costly screening of borrowers to examine how aggregate shocks are amplified and propagated through net-worth effects compared to a standard model of ex-post monitoring costs. Costly screening is a way to economize on agency costs induced by cross subsidization, but is an agency cost itself, making investment dependent on borrower net-worth. Thus, costly screening can be an alternative to widely assumed monitoring costs in generating net-worth effects that enhance the propagation of aggregate shocks. One advantage of the screening framework is that it yields wealth effects that induce persistent dynamics especially in bad times when screening is more likely, which may create deeper and longer recessions than booms. Moreover, by yielding efficient risk pricing and quantity rationing endogenously, the screening framework constitutes an empirically plausible alternative to monitoring costs to motivate the agency costs in unsecured lending.