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Screening, Bidding, and the Loan Market Tightness

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  • Shouyong Shi

    (Queen's University)

  • Melanie Cao

    (Queen's University)

Abstract

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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File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_989.pdf
File Function: First version 1999
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Bibliographic Info

Paper provided by Queen's University, Department of Economics in its series Working Papers with number 989.

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Length: 46 pages
Date of creation: Feb 1999
Date of revision:
Handle: RePEc:qed:wpaper:989

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Keywords: Screening; Bidding; Loans; Informational externality;

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References

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  1. von Thadden, Ernst-Ludwig, 2004. "Asymmetric information, bank lending and implicit contracts: the winner's curse," Finance Research Letters, Elsevier, vol. 1(1), pages 11-23, March.
  2. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  3. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. Mitchell Berlin & Alexander Butler, 2002. "Collateral and competition," Working Papers 02-22, Federal Reserve Bank of Philadelphia.
  2. Nicola Cetorelli, 2002. "Does bank concentration lead to concentration in industrial sectors?," Proceedings 818, Federal Reserve Bank of Chicago.
  3. Kirstein, Roland, 2000. "The New Basle Accord, Internal Ratings, and the Incentives of Banks," CSLE Discussion Paper Series 2000-06, Saarland University, CSLE - Center for the Study of Law and Economics.
  4. Nicola Cetorelli & Pietro F. Peretto, 2000. "Oligopoly banking and capital accumulation," Working Paper Series WP-00-12, Federal Reserve Bank of Chicago.
  5. Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
  6. Presbitero, Andrea F. & Zazzaro, Alberto, 2011. "Competition and relationship lending: Friends or foes?," Journal of Financial Intermediation, Elsevier, vol. 20(3), pages 387-413, July.
  7. Nicola Cetorelli, 2001. "Competition among banks: good or bad?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 38-48.
  8. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Working Papers 04-24, Bank of Canada.

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