Essays on Information Asymmetries in Lending.

Abstract

I study information asymmetries in loan underwriting. In the first chapter, I develop a model of how loan officers interpret and use soft information in making decisions about the size of loans they give to applicants. The model emphasizes loan officer heterogeneity in risk preferences, ability, and beliefs about ability. I recover estimates of these loan officer characteristics using data on the joint distribution of loan decisions and outcomes. I find that loan officers differ across all three dimensions of heterogeneity, but that they are able to generate higher profits for the lender than would a mechanistic decision process that would solely utilize hard information. In the second chapter, I estimate the effect of moral hazard on loan default. I account for potential endogeneity by exploiting a natural experiment where borrower applications are randomly assigned as an instrument for loan sizes. I find that borrowers become more likely to default in response to larger loans, but the lender may be able to attenuate this additional risk with increased collection intensity on larger loans. In the third chapter, I examine peer effects arising from a coworker's default on the probability that a borrower will be late on loan payments. I rely on rich data detailing coworker relationships and time-varying fixed effects to control for correlated unobservables and endogenous group formation. I find that borrowers are more likely to be late with their payment when they have coworkers who default.