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Foreign entry and bank competition

  • Rajdeep Sengupta

Foreign entry and bank competition are modeled as the interaction between asymmetrically informed principals: the entrant uses collateral as a screening device to contest the incumbent's informational advantage. Both better information ex ante and stronger legal protection ex post are shown to facilitate the entry of low-cost outside competitors into credit markets. The entrant's success in gaining borrowers of higher quality by offering cheaper loans increases with its efficiency (cost) advantage. This paper accounts for evidence suggesting that foreign banks tend to lend more to large firms thereby neglecting small and medium enterprises. The results also explain why this observed "bias" is stronger in emerging markets.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-043.

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Date of creation: 2006
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Publication status: Published in Journal of Financial Economics, May 2007, 84(2), pp. 502-28
Handle: RePEc:fip:fedlwp:2006-043
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