Bank Competition and Collateral: Theory and Evidence
26 Pages Posted: 13 Oct 2008 Last revised: 29 Jul 2009
Date Written: October 10, 2008
We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking collateral. We show that presence of collateral is more likely when bank competition is lower. We then test empirically this prediction on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions of a negative role of bank competition on the presence of collateral. These findings survive several robustness checks.
Keywords: Collateral, Bank Competition, Asymmetric information
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