Collateral Versus Project Screening: A Model of Lazy Banks

Posted: 19 Nov 2001

See all articles by Michael Manove

Michael Manove

Boston University - Department of Economics

Jorge Padilla

Compass Lexecon

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics; Centre for Studies in Economics and Finance (CSEF); Einaudi Institute for Economics and Finance (EIEF); Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Abstract

Many economists argue that the primary economic function of banks is to provide cheap credit, and to facilitate this function, they advocate the strict protection of creditor rights. But banks can serve another important economic function: by screening projects they can reduce the number of project failures and thus mitigate their private and social costs. In this article we show that because of market imperfections in the banking industry, strong creditor protection may lead to market equilibria in which cheap credit is inappropriately emphasized over project screening. Restrictions on collateral requirements and the protection of debtors in bankruptcy may redress this imbalance and increase credit-market efficiency.

Suggested Citation

Manove, Michael and Padilla, Jorge and Pagano, Marco, Collateral Versus Project Screening: A Model of Lazy Banks. RAND Journal of Economics, Vol. 32, No. 4, Winter 2001. Available at SSRN: https://ssrn.com/abstract=290613

Michael Manove (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
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Jorge Padilla

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

Marco Pagano

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy
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+39 081 7663540 (Fax)

Centre for Studies in Economics and Finance (CSEF) ( email )

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Complesso Monte S. Angelo
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Italy

Einaudi Institute for Economics and Finance (EIEF)

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Research Institute of Industrial Economics (IFN)

Box 55665
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Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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