Credit Decisions and Adverse Selection: An Empirical Study of Banking Behavior
36 Pages Posted: 2 Nov 2000
Date Written: July 2000
The purpose of this work is to establish what bank strategies in fixing the credit conditions are in an asymmetric information framework. In order to do this, we use a set of 8646 observations of Belgian small and medium sized businesses. The numerous empirical tests realized seem to indicate that banks do not use separating contracts to distinguish risks in a given population. The results of the tests on the use of pooling contracts are more ambiguous although it is shown that the charged rates do not represent correctly the future risk of borrowers. However, the study allows us to conclude that banks use a gradual acquisition strategy within the context of their customer relationships. In parallel, we bring to the fore the monopoly power of banks and the essential role of credit guarantee.
Keywords: Contract theory, credit decision, customer relationships, adverse selection
JEL Classification: G21, G32
Suggested Citation: Suggested Citation