On Tuesday, February 6 at 16.40, room 3402 (Shabolovka str. 26) ICEF held the Job Market Seminar.
Speaker: Sergey Zhuk (Princeton)
Theme: "Rational Inattention and Counter-Cyclical Lending Standards" joint with Mike Mariathasan
Venue: Shabolovka st., 26, room 3402
Abstract: We develop a model of rational inattention to analyse the interaction between banks’ lending standards and aggregate economic conditions. Banks are constrained in their capacity to assess borrower quality and trade off the number of processed loan applications with the precision of their loan review. As aggregate economic conditions improve, the marginal return to additional scrutiny decreases and banks investigate applicants less carefully. As a result, they approve loans that are riskier ex-ante and generate lower expected returns, which can explain excessively lenient lending standards during market booms.