Screening Technology and Loan Portfolio Choice

We derives from a loan portfolio choice model the hypothesis that the inaccuracy level in the screening technology for a particular type of loan negatively affects the supply of that type of loan. This hypothesis is tested using three regression models, each of which includes the partial adjustment mechanism as well as incorporating one of the three different versions of expectations about inaccuracy: either adaptive expectations, Markov expectations, or perfect foresight. In all three regression models, this study finds that the U.S. banking industry data from 1987:1 to 2002:3 supports the hypothesis.