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The Effect of Bank Competition on the Bank's Incentive to Collateralize

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Author Info
Hainz, Christa

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Abstract

It 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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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 2007.

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Date of creation: Jul 2007
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Handle: RePEc:lmu:muenec:2007

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Related research
Keywords: Collateralization; screening; incentives; bank competition;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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  1. Inderst, Roman & Mueller, Holger M, 2006. "A Lender-Based Theory of Collateral," CEPR Discussion Papers 5695, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Mitchell Berlin & Alexander Butler, 2002. "Collateral and competition," Working Papers 02-22, Federal Reserve Bank of Philadelphia. [Downloadable!]
  3. Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June. [Downloadable!] (restricted)
  4. Monika Schnitzer, 1999. "On the Role of Bank Competition for Corporate Finance and Corporate Control in Transition Economies," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 155(1), pages 22-, March.
    Other versions:
  5. Alberto Zazzaro, 2005. "Should Courts Enforce Credit Contracts Strictly?," Economic Journal, Royal Economic Society, vol. 115(500), pages 166-184, 01. [Downloadable!] (restricted)
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  6. Sengupta, Rajdeep, 2007. "Foreign entry and bank competition," Journal of Financial Economics, Elsevier, vol. 84(2), pages 502-528, May. [Downloadable!] (restricted)
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  7. Manove, Michael & Padilla, Atilano Jorge, 1998. "Banking (Conservatively) With Optimists," CEPR Discussion Papers 1918, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  8. Schnitzer, Monika, 1998. "Bank Competition and Enterprise restructuring in Transition Economies," CEPR Discussion Papers 2045, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March. [Downloadable!] (restricted)
  10. Giovanni Dell'Ariccia & Robert Marquez, 2006. "Lending Booms and Lending Standards," Journal of Finance, American Finance Association, vol. 61(5), pages 2511-2546, October. [Downloadable!] (restricted)
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  11. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn. [Downloadable!] (restricted)
  12. 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.
  13. Hainz, Christa, 2003. "Bank competition and credit markets in transition economies," Journal of Comparative Economics, Elsevier, vol. 31(2), pages 223-245, June. [Downloadable!] (restricted)
  14. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September. [Downloadable!] (restricted)
  15. Nicola Cetorelli, 2001. "Competition among banks: good or bad?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 38-48. [Downloadable!]
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