Working papers: 

Screening Using a Menu of Contracts: A Structural Model for Lending Markets   [Slides], with Alberto Polo  and Quynh-Anh Vo 

    Accepted, Journal of Financial Economics    

Abstract:   When lenders screen borrowers using a menu, they generate a contractual externality by making the composition of their competitors’ borrowers worse. Using data from the UK mortgage market and a structural model of screening with endogenous menus, this paper quantifies the impact of asymmetric information on equilibrium contracts and welfare. Counterfactual simulations of a social planner problem show that, because of the externality, there is too much screening along the loan-to-value dimension. The deadweight loss, expressed in borrower utility, is equivalent to an interest rate increase of 30-60 basis points (a 15-30 percent increase) on all loans.

Screening Using a Menu of Contracts in Imperfectly Competitive Markets with Adverse Selection  [Slides]  

Abstract: I develop a model of screening with menus using a demand system that nests various degrees of competition, from perfect competition to monopoly. I show the existence of a pure strategy Nash equilibrium and characterise it in closed form. I then analyse a contractual externality and build a sufficient statistic to test for its empirical relevance. I also use the model to study credit market policies in the presence of screening. I show that contrary to conventional wisdom, increasing capital requirements, increasing the Federal Reserve rate, or decreasing competition can increase lending.  I provide an empirical application in the context of consumer credit and show that, due to the externality, the menus contain too many maturity options. Model parameters are recovered using a linear regression of prices on quantities controlling for contract market shares.

  The cost and shadow cost of credit, with Simone Lenzu and Francesco Manaresi

Reject and Resubmit, Journal of Financial Economics 

Abstract: Using a novel micro-level dataset on firms' production and financing decisions, we estimate the distribution of firm-specific financial wedges in capital accumulation due to binding borrowing constraints-the shadow cost of credit-and compare these to observed market price of credit-the borrowing rate. We find that shadow costs are significantly higher, more dispersed, and more sensitive to variations in credit risk factors than borrowing rates. Our analysis also reveals a high sensitivity of firms' investment to shadow costs, indicating that credit rationing, rather than elevated borrowing costs, is the primary channel through which credit market frictions distort investment policies and capital allocation, particularly for small and medium enterprises. 

Competing for Loan Seniority: Implications and Evidence, [Slides] with Theo Cotrim Martins and Bernardo Ricca

Abstract:  Borrowing from multiple lenders can lead to a debt dilution problem: Lenders do not internalize that issuing a new loan can affect borrowers’ ability and incentive to pay off loans provided by other lenders. Using data on the universe of retail loans in Brazil, we provide new causal estimates of the debt dilution channel. We show that, when unable to repay all their credit card debt, defaulters prioritize repaying the balance on their cards with the highest credit limit; cards originated by fintech companies, or cards from lenders that also sold them other financial products. Motivated by these facts, we develop a new structural model of lending with non-exclusive contracts in which lenders can use contract terms to gain loan seniority. We use the model to quantify the impact of debt dilution on contract terms and welfare. 

Work in progress: 

Markups in the Collateralized Loan Market, with Melina Papoutsi, Daniel Paravisini and Veronica Rappoport, draft coming soon

Abstract: Using data on the universe of European corporate loans, we document a positive relationship between collateral and interest rate after controlling for borrower characteristics. This empirical relationship is consistent with lenders refusing to offer low collateralized loans to riskier borrowers based on characteristics unobservable to the econometrician. Motivated by this stylized fact, we develop a new structural model of lending to get estimates of demand elasticities, marginal cost of lending and collateral recoup rate.  Our identification strategy is robust to lenders having private information about borrowers due to, for instance, relationship lending. We find a demand elasticity of 1.7 and low collateral recoup rates (10 percent).

Bankruptcy in Equilibrium and Ex-ante Effects, with Simone Lenzu and Jimmy Martinez-Correa

Abstract:  Most of the existing empirical studies analyzing the real effects of bankruptcy reforms focus on firms already in a default state or undergoing liquidation. Using detailed microdata from Denmark and quasi-experimental variation from a major bankruptcy reform, we estimate the causal effects of increased creditor empowerment on the (anticipatory) behavior of firms far from financial distress. By integrating these estimates into a structural model, we quantify the welfare costs of moral hazard in lending markets (effort provision and risk shifting) and explore the general equilibrium impacts of various bankruptcy reforms, offering new insights into their broader economic implications. 

Maturity Markups, with Nuno Clara and Niels Wagner

Abstract: When increasing interest rate is unprofitable because it triggers too much default, lenders can extract borrower surplus by extending the loan's maturity. Traditional empirical industrialization models do not capture this channel. This paper develops a model with endogenous maturity and estimates the interest rates and maturity distortions in the market for car loans.  

Formal Loans to the Informal Sector, with Rebecca DeSimone

Abstract: We use proprietary data from a large bank in Equator to study lending to SME in a context where there is little hard information available. We exploit exogenous variation in the incentive payment made to loan officers and analyze incentives to originate and monitor loans.