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Bank Competition and Collateral: Theory and Evidence

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Author Info
Christa Hainz () (University of Munich)
Laurent Weill () (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)
Christophe J. Godlewski () (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)

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Abstract

We 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 the 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 perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the presence of collateral. These findings survive several robustness checks.

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Publisher Info
Paper provided by Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg (France) in its series Working Papers of LaRGE (Laboratoire de Recherche en Gestion et Economie) with number 2008-19.

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Date of creation: 2008
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Handle: RePEc:lar:wpaper:2008-19

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Related research
Keywords: Collateral; Bank Competition; Asymmetric information.;

Other versions of this item:

Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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References listed on IDEAS
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  18. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
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