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Asymmetric information and imperfect competition in lending markets


Crawford, Gregory S; Pavanini, Nicola; Schivardi, Fabiano (2018). Asymmetric information and imperfect competition in lending markets. American Economic Review, 108(7):1659-1701.

Abstract

We study the effects of asymmetric information and imperfect competition in the market for small business lines of credit. We estimate a structural model of credit demand, loan use, pricing, and firm default using matched firm-bank data from Italy. We find evidence of adverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default. Our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average, reducing credit supply, banks' market power can mitigate these negative effects.

Abstract

We study the effects of asymmetric information and imperfect competition in the market for small business lines of credit. We estimate a structural model of credit demand, loan use, pricing, and firm default using matched firm-bank data from Italy. We find evidence of adverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default. Our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average, reducing credit supply, banks' market power can mitigate these negative effects.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Uncontrolled Keywords:Economics and econometrics
Language:English
Date:July 2018
Deposited On:21 Jan 2019 13:32
Last Modified:25 Sep 2019 00:06
Publisher:American Economic Association
ISSN:0002-8282
OA Status:Green
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.1257/aer.20150487
Official URL:https://www.aeaweb.org/articles?id=10.1257/aer.20150487&within%5Btitle%5D=on&within%5Babstract%5D=on&within%5Bauthor%5D=on&journal=1&q=Asymmetric+information+and+imperfect+competition+in+lending+markets&from=j

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