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Collateral vs. Project Screening: A Model of Lazy Banks

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Author Info
Michael Manove () (Boston University)
A. Jorge Padilla () (CEMFI and CEPR)
Marco Pagano () (CSEF, Università di Salerno, and CEPR)

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Abstract

Many argue that the primary function of banks is to provide cheap credit, and to this effect advocate strict protection of creditor rights. But banks serve another important function: through project screening, they can improve the allocation of capital across projects. In this paper we show that, in the presence of informational asymmetries, strong creditor protection may lead to competitive market equilibria where banks, protected by high collateral, perform an inefficiently low level of screening. Restrictions on collateral requirements and protection of debtors in bankruptcy may thus increase credit market efficiency.

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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 10.

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Date of creation: 01 Nov 1998
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Publication status: Published in RAND Journal of Economics, Vol. 32, No. 4, Winter, 2001
Handle: RePEc:sef:csefwp:10

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Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G2 - Financial Economics - - Financial Institutions and Services
K2 - Law and Economics - - Regulation and Business Law

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