The Effect of Bank Competition on the Bank's Incentive to Collateralize
AbstractIt has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project's risk than entrepreneurs. We study the bank's choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.
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Bibliographic InfoPaper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 2007.
Date of creation: Jul 2007
Date of revision:
Collateralization; screening; incentives; bank competition;
Find related papers by JEL classification:
- 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
- K00 - Law and Economics - - General - - - General (including Data Sources and Description)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-08-08 (All new papers)
- NEP-BAN-2007-08-08 (Banking)
- NEP-COM-2007-08-08 (Industrial Competition)
- NEP-LAW-2007-08-08 (Law & Economics)
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