Asymmetric Information and Imperfect Competition in Lending Markets
65 Pages Posted: 9 Mar 2015 Last revised: 23 Oct 2017
Date Written: March 2015
We study the effects of asymmetric information and imperfect competition in the market for small business lines of credit. We estimate a structural model of credit demand, loan use, pricing, and firm default using matched firm-bank data from Italy. We find evidence of
adverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default. Our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average, reducing credit supply, banks market power can mitigate these negative effects.
Keywords: assymetric information, credit markets, imperfect competition, lending markets
JEL Classification: D82, G21, L13
Suggested Citation: Suggested Citation