In the data, most consumer defaults on unsecured credit are informal and the lending industry devotes significant resources to debt collection. We develop a new theory of credit card lending that takes these two features into account. The two key elements of our model are moral hazard and costly state verification that relies on the use of information technology. We show that the model gives ri...

Research on relationship lending focuses attention on economic factors which influence the relationships between SMEs’ owners/managers and banks but no previous work has focused on the role of trust. Trust is expected to reduce agency costs, the perceived credit risk and, thus, influence credit availability and credit terms. Trustworthiness is associated with three attributes of SME owner manag...

Regulators express growing concern over “predatory lending,” which we take to mean lending that reduces the expected utility of borrowers. We present a rational model of consumer credit in which such lending is possible, and we identify the circumstances in which it arises with and without competition. Predatory lending is associated with imperfect competition, highly collateralized loans, and ...

Research on relationship lending focuses attention on economic factors which influence the relationships between SMEs’ owners/managers and banks but no previous work has focused on the role of trust. Trust is expected to reduce agency costs, the perceived credit risk and, thus, influence credit availability and credit terms. Trustworthiness is associated with three attributes of SME owner manag...

Research on relationship lending focuses attention on economic factors which influence the relationships between SMEs’ owners/managers and banks but no previous work has focused on the role of trust. Trust is expected to reduce agency costs, the perceived credit risk and, thus, influence credit availability and credit terms. Trustworthiness is associated with three attributes of SME owner manag...

Abstract This paper explores the implications of technological progress in consumer lending. The model features households whose endowment risk is private information, and intermediaries which observe a noisy signal of each borrower’s default risks. To offer a lending contract, an intermediary incurs a fixed cost. Each lending contract is comprised of an interest rate, a borrowing limit and a s...

Changes in credit risk may arise when either the value or the risk of corporate assets changes. Changes in the equity value associated with the changes in the asset value and changes in asset risk can be characterized into potentially countervailing direct and indirect effects. The indirect effect of risk on equity value is a function of factors that affect the debt value of including leverage,...

This paper develops a stochastic dynamic model to examine the impact of capital regulation on banks’ financial decisions. In equilibrium, lending decisions, capital buffer, and the probability of bank failure are endogenously determined. Compared to a flat-rate capital rule, a risk-sensitive capital standard causes the capital requirement to be much higher for small (and riskier) banks and much...

Peer-to-peer lending platforms such as Prosper Marketplace facilitate lending by matching potential borrowers with potential lenders using an auction mechanism. Borrowers can post loan requests and lenders can bid on a request specifying a minimum interest rate and an amount they are willing to lend. In this paper we analyze the impact of social information on the interest rate of funded loans ...

This paper analyzes the linkages between credit supply conditions and bank lending. Building on the recent work of Gilchrist and Zakraǰsek [2011], we use the excess bond premium—a component of corporate credit spreads designed to measure shifts in the risk attitudes of financial intermediaries—to empirically identify credit supply shocks. Our results indicate that shocks to the excess bond prem...