Bank competition and collateral: theory and evidence
AbstractWe investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We estimate logit models where the presence of collateral is regressed on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the use of collateral. These findings survive several robustness checks.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 27/2008.
Length: 37 pages
Date of creation: 02 Dec 2008
Date of revision:
collateral; bank competition; asymmetric information;
Other versions of this item:
- Christa Hainz & Laurent Weill & Christophe Godlewski, 2013. "Bank Competition and Collateral: Theory and Evidence," Journal of Financial Services Research, Springer, vol. 44(2), pages 131-148, October.
- Christa Hainz & Laurent Weill & Christophe J. Godlewski, 2008. "Bank Competition and Collateral: Theory and Evidence," Working Papers of LaRGE Research Center 2008-19, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg (France).
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-14 (All new papers)
- NEP-BAN-2008-12-14 (Banking)
- NEP-BEC-2008-12-14 (Business Economics)
- NEP-CBA-2008-12-14 (Central Banking)
- NEP-CFN-2008-12-14 (Corporate Finance)
- NEP-COM-2008-12-14 (Industrial Competition)
- NEP-CTA-2008-12-14 (Contract Theory & Applications)
- NEP-FMK-2008-12-14 (Financial Markets)
- NEP-URE-2008-12-14 (Urban & Real Estate Economics)
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