SLIDE 1 Discussion of
Observing Unobservables: Identifying Informational Asymmetries with a Consumer Credit Field Experiment & A Reexamination of the Role of “Relationships” in the Loan Granting Process
Ed Nosal Federal Reserve Bank of Cleveland
SLIDE 2
Economists have identified some informational asymmetries that may exist in the market for loans
SLIDE 3
Economists have identified some informational asymmetries that may exist in the market for loans
– Adverse selection: the quality of the “project” that underlies the loan unknown
SLIDE 4
Economists have identified some informational asymmetries that may exist in the market for loans
– Adverse selection: the quality of the “project” that underlies the loan unknown – Moral Hazard: how hard borrower willing to work to payoff loan unknown
SLIDE 5
Are these information asymmetries something that a banker should be concerned about?
SLIDE 6
Are these information asymmetries something that a banker should be concerned about? Yes … if they exist
SLIDE 7
- Example: Banker can’t observe quality of
the project that underlies loan
SLIDE 8
- Example: Banker can’t observe quality of
the project that underlies loan
- Charges interest rate associated with
“average” quality project
SLIDE 9
- Example: Banker can’t observe quality of
the project that underlies loan
- Charges interest rate associated with
“average” quality project
- Average interest rate attracts only low
quality projects
SLIDE 10
- Example: Banker can’t observe quality of
the project that underlies loan
- Charges interest rate associated with
“average” quality project
- Average interest rate attracts only low
quality projects
- Banks will lose money on these loans
SLIDE 11
Questions
SLIDE 12 Questions
- 1. Do informational asymmetries exist
in the loans market?
SLIDE 13 Questions
- 1. Do informational asymmetries exist
in the loans market?
- 2. If yes, how do bankers deal with
them?
SLIDE 14
- 1. Do informational asymmetries
exist? (Karlan and Zinman)
SLIDE 15
- 1. Do informational asymmetries
exist? (Karlan and Zinman)
- Adverse selection: females
SLIDE 16
- 1. Do informational asymmetries
exist? (Karlan and Zinman)
- Adverse selection: females
- Moral Hazard: males
SLIDE 17
Implications:
SLIDE 18 Implications:
- Males and females should be given
different loan contracts
SLIDE 19 Implications:
- Males and females should be given
different loan contracts
- Offering different contracts
problematic … discriminatory
SLIDE 20
- 2. How might bankers deal
informational asymmetries?
SLIDE 21
- 2. How might bankers deal
informational asymmetries?
Relationships (Chakravarty and Yilmazer)
SLIDE 22
- 2. How might bankers deal
informational asymmetries?
Relationships (Chakravarty and Yilmazer) Overtime informational problems decrease
SLIDE 23
Chakravarty and Yilmazer
SLIDE 24 Chakravarty and Yilmazer
- “Discrimination” occurs at the loan
application and loan approval stages
SLIDE 25 Chakravarty and Yilmazer
- “Discrimination” occurs at the loan
application and loan approval stages
- Bad types weeded out at these
stages … survivors get same loan rate
SLIDE 26
Parting Question
SLIDE 27 Parting Question
- Bankers (in a relationship) seem to be
throwing away valuable information (and profits!)
SLIDE 28 Parting Question
- Bankers (in a relationship) seem to be
throwing away valuable information (and profits!)
- Instead of rejecting loan, why not charge
higher interest rate?
