We determine the optimal length of exclusion from borrowing after a default that allows the bank to ensure that borrowers do not default strategically. We find that the optimal length of exclusion is smaller if borrowers are less risky, have higher returns, markets are more competitive, deposit...

I develop a model in which the ability to repay a loan is private information that can only be verified by the bank at some costs, which can be recovered from the borrower if it has reported untruthfully. The bank will optimize the resources it spends on this auditing of borrowers and the...