We propose a quantitative model of lending standards with two reasons for inefficient credit: lenders' moral hazard from deposit insurance or government guarantees, and imperfect information about the persistence of asset price growth, which generates incorrect but rational beliefs in the...

This paper is a quantitative study of two frictions that generate banks' underinvestment in screening borrowers and, thus, overlending: 1) Limited liability, and 2) Banks failing to internalize that their credit decisions alter the pool of borrowers faced by other banks. The resulting lax...

We propose a quantitative model of lending standards with two reasons for inefficient credit: lenders' moral hazard from deposit insurance or government guarantees, and imperfect information about the persistence of asset price growth, which generates incorrect but rational beliefs in the...

This paper is a quantitative study of two frictions that generate banks' underinvestment in screening borrowers and, thus, overlending: 1) Limited liability, and 2) Banks failing to internalize that their credit decisions alter the pool of borrowers faced by other banks. The resulting lax...