Inefficiently low screening with Walrasian markets

Financial intermediaries devote resources to finding and screening borrowers before lending capital. By retaining only sufficiently good matches, informed lenders exacerbate adverse selection problems for others in the same market. Failure internalize this implies that are too selective matches they retain. The resulting under-use of capital pushes cost down, decreasing benefit being rather than uninformed prompting a reallocation from matching. Compared constrained efficient allocation, decentralized equilibrium has little screening, credit, much credit.