Bank competition and financing efficiency under asymmetric information

Sonny Biswas, Kostas Koufopoulos

Research output: Contribution to journalArticle (Academic Journal)peer-review

4 Citations (Scopus)

Abstract

We consider a setting in which an entrepreneur seeks bank financing, and the project type is her private information. Different from existing theories featuring information asymmetry, and consistent with empirical findings, our model predicts: greater bank competition leads to increased bank lending as interest rates fall, leading to lower quality loans. The relationship between market power and financing efficiency is hill-shaped. An intermediate level of market power is desirable, as it can mitigate inefficiencies arising due to cross-subsidization among borrowers in a pooling equilibrium. Interest rate controls may achieve efficiency, but the specific policy depends on the bank market structure.
Original languageEnglish
Article number101504
Number of pages11
JournalJournal of Corporate Finance
Volume65
Early online date24 Aug 2019
DOIs
Publication statusPublished - 1 Dec 2020

Structured keywords

  • AF Banking

Keywords

  • Bank market power
  • Deregulations
  • Loan quality
  • Asymmetric information
  • Interest rate controls

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