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Asymmetric Information and Imperfect Competition in the Loan Market

  • Crawfordy, Gregory S

    (University of Zurich, CEPR and CAGE)

  • Pavaniniz, Nicola

    (zUniversity of Zurich)

  • Schivardi, Fabiano

    (xLUISS, EIEF and CEPR)

We measure the consequences of asymmetric information in the Italian market for small business lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population of medium and large Italian banks, individual lines of credit between them, and subsequent individual defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric information in this market. While our data include a measure of observable credit risk comparable to that available to a bank during the application process, we allow firms to have private information about the underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information, separately identifying adverse selection and moral hazard. We use our results to quantify the impact of asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating these effects.

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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 167.

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Date of creation: 2013
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Handle: RePEc:cge:wacage:167
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  1. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  2. Giorgio Gobbi & Francesca Lotti, 2004. "Entry decisions and adverse selection: an empirical analysis of a local credit markets," Temi di discussione (Economic working papers) 535, Bank of Italy, Economic Research and International Relations Area.
  3. repec:cup:cbooks:9780521747387 is not listed on IDEAS
  4. Marcello Bofondi & Giorgio Gobbi, 2006. "Informational Barriers to Entry into Credit Markets," Review of Finance, European Finance Association, vol. 10(1), pages 39-67.
  5. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  7. William G. Gale, 1988. "Federal Lending and the Market for Credit," UCLA Economics Working Papers 504, UCLA Department of Economics.
  8. repec:cup:cbooks:9780521766555 is not listed on IDEAS
  9. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
  10. Benjamin R. Handel, 2011. "Adverse Selection and Switching Costs in Health Insurance Markets: When Nudging Hurts," NBER Working Papers 17459, National Bureau of Economic Research, Inc.
  11. Panetta, Fabio & Schivardi, Fabiano & Shum, Matthew, 2005. "Do Mergers Improve Information? Evidence from the Loan Market," CEPR Discussion Papers 4961, C.E.P.R. Discussion Papers.
  12. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  13. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, 09.
  14. Albareto, Giorgio & Benvenuti, Michele & Mocetti, Sauro & Pagnini, Marcello & Rossi, Paola, 2011. "The Organization of Lending and the Use of Credit Scoring Techniques in Italian Banks," Journal of Financial Transformation, Capco Institute, vol. 32, pages 143-158.
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