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Information externalities in the credit market and the spell of credit rationing
Institution:1. Department of Finance, New York University Stern School of Business, 44 West 4th St., #9-84, New York, NY 10012, United States;2. CEPR, United Kingdom;3. NBER, United States;4. Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045, United States;1. Federal Deposit Insurance Corporation, Washington, DC, United States;2. Villanova School of Business, Villanova University, Villanova, PA, United States;3. George Mason University, Department of Economics, Fairfax, VA, United States;4. U.S. Securities and Exchange Commission, Washington, DC, United States;1. International Monetary Fund, 700 19th St. N.W., Washington DC 20431, United States;2. Financial Economist, Finance and Private Sector Development Research Group, The World Bank, United States;1. Department of Finance, CUNEF (Colegio Universitario de Estudios Financieros), Madrid, Spain\n;2. Department of Business Administration, University of Oviedo, Oviedo, Spain;1. T. Rowe Price Associates, Inc., United States;2. School of Hotel Administration, Cornell College of Business, Cornell University, United States\n;3. Dyson School of Applied Economics and Management, Cornell College of Business, Cornell University, United States\n
Abstract:We present the first empirical study of loan searching strategies and loan granting decisions in a context where banks observe whether applicants have unsuccessfully applied for credit to other lenders in the past. Our identification strategy benefits from the use of granular data on loan applications and exploits the fact that evaluating lenders observe only the rejections received by a borrower up to six months before the current application. We document that past rejections diminish the probability of approval and increase the probability that a loan search is interrupted.
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