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Screening, Bidding, and the Loan Market Tightness

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Abstract

Bank loans are more available and cheaper for new and small businesses in the U.S. in areas with highly concentrated banks than in areas with highly competitive banks. To explain this fact, we analyze banks' decisions to screen the project 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. This occurs when the screening cost is not very high, in which case all active bidders are informed. The opposite outcome occurs when the screening cost is high, in which case there are sufficiently many uninformed banks in bidding to attenuate the negative informational externality. Les crédits sont plus facilement disponibles et meilleur marché pour les nouvelles et petites entreprises américaines dans les zone à haute concentration bancaire que dans les zones à forte concurrence bancaire. Pour expliquer ce fait, nous analysons les décisions de sélection de projet par les banques et leur concurrence dans le financement de projets. Nous montrons qu'en augmentant l'externalité informationnelle négative d'un gagnant informé, une augmentation du nombre de banques dans le marché peut réduire suffisamment la probabilité de sélection, réduire le nombre de banques qui sont activement en concurrence pour les crédits et augmenter le taux d'emprunt attendu. Ceci a lieu lorsque le coût de sélection est élevé, auquel cas il y a un nombre suffisant de banques non-informées qui soumissionnent pour que cela atténue l'externalité informationnelle négative.

Suggested Citation

  • Melanie Cao & Shouyong Shi, 1999. "Screening, Bidding, and the Loan Market Tightness," Cahiers de recherche CREFE / CREFE Working Papers 80, CREFE, Université du Québec à Montréal.
  • Handle: RePEc:cre:crefwp:80
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    References listed on IDEAS

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    1. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    2. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 407-443.
    3. 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.
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    Cited by:

    1. 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.
    2. Kirstein, Roland, 2002. "The new Basle Accord, internal ratings, and the incentives of banks," International Review of Law and Economics, Elsevier, vol. 21(4), pages 393-412, May.
    3. Anthony Yezer & Pingkang Yu, 2016. "Costly Screening, Self-Selection, Fraud, and the Organization of Credit Markets," Working Papers 2016-4, The George Washington University, Institute for International Economic Policy.
    4. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Staff Working Papers 04-24, Bank of Canada.
    5. Mitchell Berlin & Alexander W. Butler, 2002. "Collateral and competition," Working Papers 02-22, Federal Reserve Bank of Philadelphia.
    6. Braz Camargo & Kyungmin Kim & Benjamin Lester, 2016. "Information Spillovers, Gains from Trade, and Interventions in Frozen Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1291-1329.
    7. Nicola Cetorelli, 2001. "Does bank concentration lead to concentration in industrial sectors?," Working Paper Series WP-01-01, Federal Reserve Bank of Chicago.
    8. Hans Degryse & Nancy Masschelein & Janet Mitchell, 2004. "Belgian SMEs and bank lending relationships," Financial Stability Review, National Bank of Belgium, vol. 2(1), pages 121-133, June.
    9. Florian LEON, 2015. "What do we know about the role of bank competition in Africa?," Working Papers 201516, CERDI.
    10. Cetorelli, Nicola & Peretto, Pietro F., 2000. "Oligopoly Banking and Capital Accumulation," Working Papers 00-19, Duke University, Department of Economics.
    11. Luca Papi & Emma Sarno & Alberto Zazzaro, 2017. "The geographical network of bank organizations: issues and evidence for Italy," Chapters,in: Handbook on the Geographies of Money and Finance, chapter 8, pages 156-196 Edward Elgar Publishing.
    12. Li, Zhe & Sun, Jianfei, 2011. "Bank competition, securitization and risky investment," MPRA Paper 34173, University Library of Munich, Germany.
    13. Nicola Cetorelli, 2001. "Competition among banks: good or bad?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 38-48.
    14. Albert Menkveld & Boyan Jovanovic, 2016. "Dispersion and Skewness of Bid Prices," 2016 Meeting Papers 1395, Society for Economic Dynamics.

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    Keywords

    screening; bidding; loans; information externality;

    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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