Bank Competition, Information Choice and Inefficient Lending Booms

44 Pages Posted: 19 Dec 2015

Date Written: December 9, 2015

Abstract

This paper studies the implications of a free-riding problem between competing banks: prospective borrowers can use loan offers of informed lenders to bargain for better terms of credit elsewhere. In anticipation of this problem, banks adopt inefficiently lax lending standards and reduce screening effort in order to deter borrower poaching. In a dynamic version of the model, the distortions from free-riding create inefficient boom-bust cycles in lending: credit is poorly screened and excessive in good times, and is inefficiently rationed during recessions. More bank competition exacerbates the problem and reduces welfare.

Keywords: free-riding, banking competition, poaching, credit booms

JEL Classification: G21, E44, D82

Suggested Citation

Petriconi, Silvio, Bank Competition, Information Choice and Inefficient Lending Booms (December 9, 2015). Available at SSRN: https://ssrn.com/abstract=2705043 or http://dx.doi.org/10.2139/ssrn.2705043

Silvio Petriconi (Contact Author)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://silviopetriconi.github.io

IGIER ( email )

Via Roentgen 1
Milan, 20136
Italy

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