Competitive Lending with Partial Knowledge of Loan Repayment: Some Positive and Normative Analysis

Abstract

We study a credit market where lenders with partial knowledge of repayment use one of several criteria to make lending decisions. Supposing that a public Authority wants to maximize the social return to borrowing, we study interventions that manipulate the return on the safe asset or guarantee a minimum loan return. Manipulating the return on the safe asset is effective if lender beliefs about the return to lending are not too pessimistic relative to those of the Authority. Guaranteeing a minimum return is effective if lender beliefs are not too optimistic relative to those of the Authority. © 2011 The Ohio State University.