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The Effect of Bank Competition on the Bank’s Incentive to Collateralize


  • Hainz, Christa


It has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project’s risk than entrepreneurs. We study the bank’s choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.

Suggested Citation

  • Hainz, Christa, 2007. "The Effect of Bank Competition on the Bank’s Incentive to Collateralize," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 216, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  • Handle: RePEc:trf:wpaper:216

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    References listed on IDEAS

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    More about this item


    collateralization; screening; incentives; bank competition;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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