Exclusion, Competition, and Regulation in the Retail Loan Market

29 Pages Posted: 6 Jan 2014 Last revised: 7 Jul 2014

See all articles by Arie Melnik

Arie Melnik

University of Haifa - Department of Economics

Oz Shy

Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: July 6, 2014

Abstract

Exclusion of borrowers from credit markets became a primary concern for regulators during the recovery from the recent recession. The paper analyzes loan-making institutions that set both interest rates and minimum credit requirements. We propose analytical measures of the degree of borrower exclusion from receiving loans. We analyze five market structures: Single lender, regulated interest rate, entry, interest rate discrimination, and highly-competitive lenders. Interest rate regulation improves total welfare relative to a single lender market. However, entry of a second lender reduces exclusion and generates higher total welfare. In the absence of fixed costs, perfect and Bertrand competition are optimal.

Keywords: Credit quality, financial regulation, lending, exclusion of borrowers

JEL Classification: D43, G21

Suggested Citation

Melnik, Arie L. and Shy, Oz, Exclusion, Competition, and Regulation in the Retail Loan Market (July 6, 2014). Available at SSRN: https://ssrn.com/abstract=2374975 or http://dx.doi.org/10.2139/ssrn.2374975

Arie L. Melnik

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

Oz Shy (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/shy-oz.aspx

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