American Economic Review Vol. 108 No. 7 2018

Asymmetric Information and Imperfect Competition in Lending Markets

Gregory S. Crawford¹; Nicola Pavanini²; Fabiano Schivardi³

¹ Department of Economics, University of Zürich, Schönberggasse 1, 8001 Zürich, Switzerland, and CEPR (email: ) · ² Department of Finance, Tilburg University, PO Box 90153, 5000 LE Tilburg, The Netherlands, and CEPR (email: ) · ³ Department of Economics and Finance, LUISS University, Viale Romania 32, 00197 Rome, Italy, EIEF and CEPR (email: )

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.

DOI

10.1257/aer.20150487

Volume

108

Issue

7

Pages

1659-1701

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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