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Bank Competition and Collateral: Theory and Evidence

  • Christa Hainz

    ()

    (University of Munich)

  • Laurent Weill

    ()

    (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)

  • Christophe J. Godlewski

    ()

    (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)

We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that the presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the presence of collateral. These findings survive several robustness checks.

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Paper provided by Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg in its series Working Papers of LaRGE Research Center with number 2008-19.

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Date of creation: 2008
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Handle: RePEc:lar:wpaper:2008-19
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  1. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
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  10. Weill, Laurent & Godlewski, Christophe, 2006. "Does Collateral Help Mitigate Adverse Selection ? A Cross-Country Analysis," MPRA Paper 2508, University Library of Munich, Germany.
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