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Asymmetric information and imperfect competition in lending markets

Crawford,G.S.
; 
Pavanini,Nicola
; 
Schivardi,F.
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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Date
2018-07
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Tilburg University Research Output Collection
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Keywords
D22 - Firm Behavior: Empirical Analysis, D82 - Asymmetric and Private Information ; Mechanism Design, G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages, L13 - Oligopoly and Other Imperfect Markets, L25 - Firm Performance: Size, Diversification, and Scope, SDG 8 - Decent Work and Economic Growth, SDG 9 - Industry, Innovation, and Infrastructure
Citation
Crawford, G S, Pavanini, N & Schivardi, F 2018, 'Asymmetric information and imperfect competition in lending markets', American Economic Review, vol. 108, no. 7, pp. 1659-1701. https://doi.org/10.1257/aer.20150487
URI
https://hdl.handle.net/20.500.14602/68023
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