Bank Competition and Collateral: Theory and Evidence

40 Pages Posted: 22 Dec 2008

See all articles by Christa Hainz

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)

Christophe J. Godlewski

University of Strasbourg - Faculty of Law and Business; EM Strasbourg Business School; LaRGE Research Center

Multiple version iconThere are 2 versions of this paper

Date Written: December, 15 2008

Abstract

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 for collateral. We show that presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We estimate logit models where the presence of collateral is regressed on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the use of collateral. These findings survive several robustness checks.

Keywords: collateral, bank competition, asymmetric information

JEL Classification: G21, D43, D82

Suggested Citation

Hainz, Christa and Weill, Laurent and Godlewski, Christophe J., Bank Competition and Collateral: Theory and Evidence (December, 15 2008). Bank of Finland Research Discussion Paper No. 27/2008. Available at SSRN: https://ssrn.com/abstract=1316379 or http://dx.doi.org/10.2139/ssrn.1316379

Christa Hainz

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 81069
Germany

Laurent Weill (Contact Author)

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie) ( email )

61 Avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

Christophe J. Godlewski

University of Strasbourg - Faculty of Law and Business ( email )

1 place d'Athènes
Strasbourg, 67000
France

HOME PAGE: http://droit.unistra.fr/

EM Strasbourg Business School ( email )

61 Avenue de la Forêt Noire
Strasbourg, 67000
France

HOME PAGE: http://www.em-strasbourg.eu/

LaRGE Research Center ( email )

1 place d'Athènes
Strasbourg, 67000
France

HOME PAGE: http://droit.unistra.fr/

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