Bank loans are more available and cheaper for new and small businesses in the US in areas with highly concentrated banks than in areas with highly competitive banks. We explain this fact by analyzing banks' decisions to screen risky projects and their subsequent competition in loan provisions. It is shown that, by increasing a negative informational externality to an informed winner, an increase in the number of banks in the market can reduce banks' screening probability sufficiently, reduce the number of banks that actively compete in loan provisions and increase the expected loan rate. Policy implications are examined.
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Paper provided by Queen's University, Department of Economics in its series Working Papers with number
989.
Find related papers by JEL classification: G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages D44 - Microeconomics - - Market Structure and Pricing - - - Auctions L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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