Asymmetric Information and Imperfect Competition in the Loan Market
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.
|Date of creation:||2013|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0) 2476 523202
Fax: +44 (0) 2476 523032
Web page: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Ben Bernanke & Mark Gertler, 1987.
"Financial Fragility and Economic Performance,"
NBER Working Papers
2318, National Bureau of Economic Research, Inc.
- Gale, William G., 1990.
"Federal lending and the market for credit,"
Journal of Public Economics,
Elsevier, vol. 42(2), pages 177-193, July.
- R. Glenn Hubbard, 1997.
"Capital-Market Imperfections and Investment,"
NBER Working Papers
5996, National Bureau of Economic Research, Inc.
- 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 143-168.
- 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.
- 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.
- Giorgio Gobbi & Francesca Lotti, 2004. "Entry Decisions and Adverse Selection: An Empirical Analysis of Local Credit Markets," Journal of Financial Services Research, Springer, vol. 26(3), pages 225-244, December.
- 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.
- Banerjee, Abhijit V & Newman, Andrew F, 1993.
"Occupational Choice and the Process of Development,"
Journal of Political Economy,
University of Chicago Press, vol. 101(2), pages 274-98, April.
- 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.
- Marcello Bofondi & Giorgio Gobbi, 2006. "Informational Barriers to Entry into Credit Markets," Review of Finance, European Finance Association, vol. 10(1), pages 39-67.
- 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.
- Fabio Panetta & Fabiano Schivardi & Matthew Shum, 2009.
"Do Mergers Improve Information? Evidence from the Loan Market,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 41(4), pages 673-709, 06.
- 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.
- Fabio Panetta & Fabiano Schivardi & Matthew Shum, 2004. "Do mergers improve information? Evidence from the loan market," Temi di discussione (Economic working papers) 521, Bank of Italy, Economic Research and International Relations Area.
- Fabio Panetta & Fabiano Schivardi & Matthew Shum, 2004. "Do mergers improve information? evidence from the loan market," Proceedings 942, Federal Reserve Bank of Chicago.
- repec:cup:cbooks:9780521747387 is not listed on IDEAS
- Mankiw, N Gregory, 1986.
"The Allocation of Credit and Financial Collapse,"
The Quarterly Journal of Economics,
MIT Press, vol. 101(3), pages 455-70, August.
- repec:cup:cbooks:9780521766555 is not listed on IDEAS
- 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.
When requesting a correction, please mention this item's handle: RePEc:cge:wacage:167. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Snape)
If references are entirely missing, you can add them using this form.