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Screening, Bidding, and the Loan Market Tightness

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  • Shi, Shouyong
  • Cao, Melanie

Abstract

Bank loans are more available and cheaper for new and small businesses in the U.S. in concentrated banking areas than in competitive banking areas. To explain this anomaly, we analyze banks' decisions to screen projects and their subsequent competition in loan provisions. It is shown that, by exacerbating the winner's curse, an increase in the number of banks can reduce banks' screening probability by so much that the number of banks that actively compete in loan provisions falls and the expected loan rate rises. This is the case when the screening cost is low, which induces all active bidders to be informed. The opposite outcome occurs when the screening cost is high, in which case there are su±ciently many uninformed banks in bidding to attenuate the winner's curse. We also brie°y examine policy implications.
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Suggested Citation

  • Shi, Shouyong & Cao, Melanie, 1999. "Screening, Bidding, and the Loan Market Tightness," Queen's Economics Department Working Papers 273416, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:273416
    DOI: 10.22004/ag.econ.273416
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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