The Winner's Curse in Banking

Posted: 14 Jan 1999

Abstract

Theoretical studies have noted that loan applicants rejected by one bank can apply at another bank, systematically worsening the pool of applicants faced by all banks. This study presents the first empirical evidence of this effect and explores some additional ramifications, including the role of common filters - such as commercially available credit scoring models - in mitigating this adverse selection; implications for de novo banks; implications for banks' incentives to comply with fair lending laws; and macroeconomic effects. The evidence supports the simple theory regarding loan loss rates but indicates a positive association between bank structure and income growth.

JEL Classification: G21, D80, L10

Suggested Citation

Shaffer, Sherrill, The Winner's Curse in Banking. Journal of Financial Intermediation, Vol. 7, No. 4, 1999. Available at SSRN: https://ssrn.com/abstract=144689

Sherrill Shaffer (Contact Author)

University of Wyoming ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
307-766-2173 (Phone)
307-766-5090 (Fax)

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