Governments often support private credit through guarantee schemes, which compen-sate private lenders in the event of borrower default. A key feature of such schemes isthat they rely on private banks to allocate guarantees among borrowers. Yet the role ofbanks in carrying out this allocation – and thus in shaping the effects of guarantees – isnot well understood. We study this role in an economy where...

We show that the availability of credit ratings (or other public information) increases the allocative efficiency of cash flows by reducing costly retention, but reduces lending standards and can lead to an oversupply of credit. These findings are in contrast to regulators' view of credit ratings as a "disciplining device." Moreover, improved screening does not solve the problem; as banks' screening technology becomes more precise,...

We study the joint determination of product quality and complexity in a rational setting. We introduce a novel notion of complexity, which affects how difficult it is for an agent to acquire information about product quality. In our model, an agent can accept or reject a product proposed by a designer, who can affect the quality and the complexity of the product. Examples include banks...