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Asymmetric information and imperfect competition in lending markets


Crawford, Gregory; Pavanini, Nicola; Schivardi, Fabiano (2015). Asymmetric information and imperfect competition in lending markets. Working paper series / Department of Economics 192, University of Zurich.

Abstract

We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks' optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition.

Abstract

We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks' optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:D82, G21, L13
Uncontrolled Keywords:Asymmetric information, imperfect competition, lending markets, Italian banking, adverse selection
Language:English
Date:April 2015
Deposited On:29 Apr 2015 15:32
Last Modified:08 Dec 2017 12:56
Series Name:Working paper series / Department of Economics
Number of Pages:46
ISSN:1664-7041
Official URL:http://www.econ.uzh.ch/static/wp/econwp192.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

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