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Collateral Vs. Project Screening: A Model Of Lazy Banks

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Author Info
Manove, Michael
Padilla, Atilano Jorge
Pagano, Marco

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Abstract

Many economists argue that the primary economic function of banks is to provide cheap credit, and to facilitate this function, they advocate the strict protection and enforcement of creditor rights. But banks can serve another important economic function: through project screening they can reduce the number of project failures and thus mitigate their private and social costs. Strict protection of creditor rights leaves the tradeoff between these two banking functions to the market. In this paper, we show that because of market imperfections in the banking industry, strong creditor protection may lead to market equilibria in which cheap credit is inappropriately emphasized over project screening. Restrictions on collateral requirements and the protection of debtors in bankruptcy proceedings may redress this imbalance and increase credit-market efficiency.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2439.

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Date of creation: Apr 2000
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Handle: RePEc:cpr:ceprdp:2439

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Related research
Keywords: Banks; collateral; Creditor Rights; screening;

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G20 - Financial Economics - - Financial Institutions and Services - - - General
K20 - Law and Economics - - Regulation and Business Law - - - General

References listed on IDEAS
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