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

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  • Hainz, Christa

Abstract

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.

Suggested Citation

  • Hainz, Christa, 2007. "The Effect of Bank Competition on the Bank's Incentive to Collateralize," Discussion Papers in Economics 2007, University of Munich, Department of Economics.
    • Handle: RePEc:lmu:muenec:2007
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    Cited by:

    1. Karel Janda, 2009. "Bankruptcies With Soft Budget Constraint," Manchester School, University of Manchester, vol. 77(4), pages 430-460, July.

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    More about this item

    Keywords

    Collateralization; screening; incentives; bank competition;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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