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Competition and favoritism in bank loan markets

Author

Listed:
  • Cheng, Hua
  • Li, Xue
  • Dong, Yan
  • Qi, Shusen

Abstract

This paper shows that compared to average-looking borrowers, good-looking borrowers have a loan approval rate which is 4 percentage points higher, whereas plain-looking borrowers pay a significantly higher interest rate (1 percentage point higher). However, this beauty premium only exists in concentrated markets where banks have enough market power to discriminate against the plain-looking borrowers or to show favor towards the good-looking. Once competition intensifies, the beauty premium disappears. Therefore, promoting banking market competition could considerably enhance the efficient allocation of credit by mitigating taste-based favoritism.

Suggested Citation

  • Cheng, Hua & Li, Xue & Dong, Yan & Qi, Shusen, 2020. "Competition and favoritism in bank loan markets," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:pacfin:v:59:y:2020:i:c:s0927538x19300824
    DOI: 10.1016/j.pacfin.2019.101214
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    References listed on IDEAS

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    Cited by:

    1. Natalya Zelenyuk & Robert Faff & Shams Pathan, 2021. "The impact of voluntary capital adequacy disclosure on bank lending and liquidity creation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 3915-3935, September.

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    More about this item

    Keywords

    Market structure; Bank loan; Favoritism; Beauty;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • J70 - Labor and Demographic Economics - - Labor Discrimination - - - General

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