Essays on banking: Screening technology
Abstract
This dissertation explains the behavior of the bank by focusing on the screening technology used in the loan approval process. The main goal is to find the outcome of bank competition when banks try to overcome hidden information with the screening technology. Essay 1 analyzes the screening technology choice of a bank in a two-stage duopoly model where banks choose the error level in a screening technology either without cost or with cost, and then compete with each other in a Bertrand fashion over borrowers seeking industrial loans. The key characteristic of this model is that imperfect screening at the first stage can produce locked-in borrowers and switchers while both banks' adoptions of perfect screening lead to non-positive profit for them. The main finding is that the two banks show asymmetric behavior regarding screening as long as the marginal cost for setting up screening technology is not too high. One bank chooses perfect screening while the other bank chooses imperfect screening at Nash equilibrium. Essay 2 examines the equilibrium in a competitive consumer credit market with free entry when lenders try to overcome hidden information about a continuum of borrowers with one of two kinds of screening technologies, complete and incomplete screening technologies. By identifying the marginal borrower type indifferent to a loan contract with the complete screening technology and a loan contract with the incomplete screening technology, the separation of the prime and sub-prime markets is explained as an equilibrium phenomenon. Essay 3 derives from a loan portfolio choice model the hypothesis that the inaccuracy level in the screening technology for a particular type of loan negatively affects the supply of that type of loan. This hypothesis is tested using three regression models each of which includes the partial adjustment mechanism, as well as incorporating one of the three different versions of expectations about inaccuracy: either adaptive expectations, Markov expectations, or perfect foresight. In the partial adjustment/adaptive expectations model and partial adjustment/Markov expectations model, this study finds that the U.S. banking industry data from 1987:1 to 2000:4 supports the hypothesis.
Degree
Ph.D.
Advisors
Novshek, Purdue University.
Subject Area
Economics|Economic theory|Finance|Banking
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