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Screening, Bidding, And The Loan Market Tightness

Author

Listed:
  • Melanie Cao

    (Queen's University)

  • Shouyong Shi

    (Queen's University)

Abstract

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.

Suggested Citation

  • Melanie Cao & Shouyong Shi, 1999. "Screening, Bidding, And The Loan Market Tightness," Working Paper 989, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:989
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/qed_wp_989.pdf
    File Function: First version 1999
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    Keywords

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    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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