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Screening, Bidding, and the Loan Market Tightness

  • Shouyong Shi

    (Queen's University)

  • Melanie Cao

    (Queen's University)

Bank loans are more available and cheaper for new and small businesses in the US in areas with highly concentrated banks than in areas with highly competitive banks. We explain this fact by analyzing banks' decisions to screen risky projects 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. Policy implications are examined.

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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 989.

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Length: 46 pages
Date of creation: Feb 1999
Date of revision:
Handle: RePEc:qed:wpaper:989
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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. 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.
  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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