Who Is Stricter, and Why?

Lending standards shape access to and the allocation of credit, yet the lending frontier is largely hidden and little is known about how lending standards vary across institutions. The paper presented in this ZEW Research Seminar develops a model of directed consumer search with two lenders, in which loan seekers disproportionately begin their search at one lender; It refers to this lender as more prominent. Search order generates asymmetric applicant flows and leads the more prominent lender to set stricter lending standards in equilibrium. The author tests the model's prediction using original data from an incentivized vignette experiment with loan officers from 24 financial institutions in Metropolitan Kampala. The data reveal substantial heterogeneity in lending standards across institutions for identical borrower profiles. Consistent with the model, more prominent institutions apply tighter standards.