Entry Decisions and Adverse Selection: An Empirical Analysis of Local Credit Markets

30 Pages Posted: 16 Feb 2004

Date Written: January 2004

Abstract

During the last decades there has been a widespread relaxation of legal entry barriers into the banking industry, with potential benefits for financial integration and competition. Obstacles to banks' geographical and business expansion have been removed and branching has been substantially liberalized. This paper analyzes the determinants of entry decisions into local credit markets using a unique data set before and after deregulation of the Italian banking industry. We estimate an entry model a la Poisson and find evidence that spreads between loan and deposit rates drive entry only for newly chartered banks, but does not affect the decision to open branches of banks operating in other markets. Branching by outside banks is instead positively correlated with business opportunities in the provision of financial services which do not require the acquisition of substantial proprietary information. Both these results are consistent with the hypothesis that in credit markets incumbents have an informational advantage over new entrants.

Keywords: Entry, deregulation, informational barriers, count data, overdispersion

JEL Classification: G21, L22, C25

Suggested Citation

Gobbi, Giorgio and Lotti, Francesca, Entry Decisions and Adverse Selection: An Empirical Analysis of Local Credit Markets (January 2004). Available at SSRN: https://ssrn.com/abstract=491545 or http://dx.doi.org/10.2139/ssrn.491545

Giorgio Gobbi

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Francesca Lotti (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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