Yusik Andrew Kim

To support credit-constrained small businesses, governments use loan guarantee programs that insure lenders against default risk. However, these programs face challenges in allocating appropriate loan sizes due to limited information about borrowers. I study a screening mechanism that combines two common tools in lending—a menu of contracts and soft information collection (e.g., interviews and site visits)—to mitigate borrower information asymmetry. Firms sort themselves by risk: low-risk borrowers accept more intensive soft information collection to obtain larger loans, while higher-risk borrowers choose smaller, fully guaranteed loans to avoid such scrutiny. In effect, the level of information collection becomes part of the contract menu, encouraging risk-based self-selection and improving the agency’s ability to allocate loan sizes. Using detailed data from South Korea’s loan guarantee program, I evaluate the welfare implications of this joint mechanism. I find that offering a loan guarantee menu alone increases program welfare by 3.9%, while adding soft information raises it by 8.7%. These findings highlight the complementarity between contract menus and soft information in enabling more efficient loan allocation across credit markets.