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Screening, Bidding, and the Loan Market Tightness

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.

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Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 80.

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Length: 47 pages
Date of creation: Feb 1999
Date of revision:
Handle: RePEc:cre:crefwp:80
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  1. Steven A. Sharpe, 1989. "Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships," Finance and Economics Discussion Series 70, Board of Governors of the Federal Reserve System (U.S.).
  2. Ernst-Ludwig VON THADDEN, 1998. "Asymmetric Information, Bank Lending and Implicit Contracts : The Winner's Curse," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 9809, Université de Lausanne, Faculté des HEC, DEEP.
  3. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
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