IDEAS home Printed from https://ideas.repec.org/a/oup/revfin/v10y2006i2p189-219.html
   My bibliography  Save this article

Competition in Lending: Theory and Experiments

Author

Listed:
  • Elena Asparouhova

Abstract

A variation of the Rothschild-Stiglitz' equilibrium is examined in the context of competitive lending under adverse selection. The predictions of the model are tested in an experimental market setting. If equilibrium exists, the loan contracts offered and taken should separate projects by quality. When equilibrium exists, the experiments confirm the theory. The entrepreneurs with high-risk projects take bigger loans and pay higher credit spreads than those with low-risk projects. When equilibrium does not exist, which happens exactly when the candidate equilibrium does not provide a Pareto-optimal allocation, in half of the sessions loan trading stabilizes around the candidate equilibrium pair. In the other half, however, markets never settle down. This finding has important implications. When lenders can offer menus of contracts, as is usually the case in reality, the outcome may not be the zero-profit separating contracts of the standard model. Worse, fitting the standard model to field data may lead to serious biases in estimated parameters while falsely accepting the model's main restriction (separation). Copyright 2006, Oxford University Press.

Suggested Citation

  • Elena Asparouhova, 2006. "Competition in Lending: Theory and Experiments," Review of Finance, European Finance Association, vol. 10(2), pages 189-219.
    • Handle: RePEc:oup:revfin:v:10:y:2006:i:2:p:189-219
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s10679-006-8280-8
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Thomas H. Noe & Michael J. Rebello & Thomas A. Rietz, 2012. "Product Market Efficiency: The Bright Side of Myopic, Uninformed, and Passive External Finance," Management Science, INFORMS, vol. 58(11), pages 2019-2036, November.
    2. Petra Nieken & Patrick W. Schmitz, 2023. "Contracting under asymmetric information and externalities: an experimental study," Experimental Economics, Springer;Economic Science Association, vol. 26(5), pages 989-1021, November.
    3. Eva I. Hoppe & Patrick W. Schmitz, 2013. "Contracting under Incomplete Information and Social Preferences: An Experimental Study," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(4), pages 1516-1544.
    4. Marco Cipriani & Ana Fostel & Daniel Houser, 2019. "Endogenous Leverage and Default in the Laboratory," Staff Reports 900, Federal Reserve Bank of New York.
    5. repec:nbr:nberch:12923 is not listed on IDEAS
    6. Elena Asparouhova & Peter Bossaerts & Nilanjan Roy & William Zame, 2016. "“Lucas” in the Laboratory," Journal of Finance, American Finance Association, vol. 71(6), pages 2727-2780, December.
    7. Hoppe, Eva I. & Schmitz, Patrick W., 2015. "Do sellers offer menus of contracts to separate buyer types? An experimental test of adverse selection theory," Games and Economic Behavior, Elsevier, vol. 89(C), pages 17-33.
    8. Elena Asparouhova & Peter Bossaerts & Jernej Čopič & Brad Cornell & Jakša Cvitanić & Debrah Meloso, 2015. "Competition in Portfolio Management: Theory and Experiment," Management Science, INFORMS, vol. 61(8), pages 1868-1888, August.
    9. Hoppe, Eva I. & Schmitz, Patrick W., 2018. "Hidden action and outcome contractibility: An experimental test of moral hazard theory," Games and Economic Behavior, Elsevier, vol. 109(C), pages 544-564.
    10. Kendall, Chad & Oprea, Ryan, 2018. "Are biased beliefs fit to survive? An experimental test of the market selection hypothesis," Journal of Economic Theory, Elsevier, vol. 176(C), pages 342-371.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:revfin:v:10:y:2006:i:2:p:189-219. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/eufaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.