The Effect of Bank Competition on the Bank's Incentive to Collateralize

Arbeitspapier

It has been argued that competing banks make inefficiently frequent use of collateralization in situations where they are better able to evaluate a project's risk than entrepreneurs. We study the bank's choice between screening and collateralization in a model where banks do not have this superior screening skill. In particular, we study the effect of bank competition on this choice. We find that competing banks use collateral less often than a monopolistic bank because competition will intensify if both banks collateralize. Moreover, bank competition is welfare improving if collateralization is rather costly.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Munich Discussion Paper ; No. 2007-24

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Law and Economics: General
• Subject: Collateralization ; screening ; incentives ; bank competition ; Bank ; Wettbewerb ; Kreditgeschäft ; Kreditsicherung ; Projektbewertung ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Hainz, Christa
• Event: Veröffentlichung
• (who): Ludwig-Maximilians-Universität München, Volkswirtschaftliche Fakultät
• (where): München
• (when): 2007

Further information

• DOI: doi:10.5282/ubm/epub.2007
• Handle: http://hdl.handle.net/10419/104235
• URN: urn:nbn:de:bvb:19-epub-2007-0
• Last update: 10.03.2025, 11:43 AM CET