Asymmetric Information and Imperfect Competition in Lending Markets

65 Pages Posted: 9 Mar 2015 Last revised: 23 Oct 2017

See all articles by Gregory S. Crawford

Gregory S. Crawford

University of Zurich - Department of Economics

Nicola Pavanini

Tilburg University; Tilburg University - Tilburg University School of Economics and Management; CEPR IO Programme

Fabiano Schivardi

Luiss Guido Carli - Department of Economics and Finance; Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR)

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Date Written: March 2015

Abstract

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

Crawford, Gregory S. and Pavanini, Nicola and Schivardi, Fabiano, Asymmetric Information and Imperfect Competition in Lending Markets (March 2015). CEPR Discussion Paper No. DP10473, Available at SSRN: https://ssrn.com/abstract=2575777

Gregory S. Crawford (Contact Author)

University of Zurich - Department of Economics ( email )

Schönberggasse 1
Zürich, CH-8001
Switzerland

HOME PAGE: http://www.econ.uzh.ch/faculty/groupcrawford.html

Nicola Pavanini

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://sites.google.com/site/nicolapavanini/

Tilburg University - Tilburg University School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

CEPR IO Programme ( email )

London
United Kingdom

Fabiano Schivardi

Luiss Guido Carli - Department of Economics and Finance ( email )

Viale Romania 32
Rome, Rome 00187
Italy

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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