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Bank competition and financing efficiency under asymmetric information

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  • Biswas, Swarnava (Sonny)
  • Koufopoulos, Kostas

Abstract

We consider a setting in which an entrepreneur seeks bank financing, and the project type is her private information. Different from existing theories featuring information asymmetry, and consistent with empirical findings, our model predicts: greater bank competition leads to increased bank lending as interest rates fall, leading to lower quality loans. The relationship between market power and financing efficiency is hill-shaped. An intermediate level of market power is desirable, as it can mitigate inefficiencies arising due to cross-subsidization among borrowers in a pooling equilibrium. Interest rate controls may achieve efficiency, but the specific policy depends on the bank market structure.

Suggested Citation

  • Biswas, Swarnava (Sonny) & Koufopoulos, Kostas, 2020. "Bank competition and financing efficiency under asymmetric information," Journal of Corporate Finance, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:corfin:v:65:y:2020:i:c:s0929119918307740
    DOI: 10.1016/j.jcorpfin.2019.101504
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    More about this item

    Keywords

    Bank market power; Deregulations; Loan quality; Asymmetric information; Interest rate controls;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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