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

Hainz, Christa (July 2007): The Effect of Bank Competition on the Bank's Incentive to Collateralize. Discussion Papers in Economics 2007-24

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.

• Item Type: Paper (Discussion Paper)
• Keywords: Collateralization, screening, incentives, bank competition
• Subjects: Economics; Economics > Discussion Papers in Economics; Economics > Discussion Papers in Economics > Financial Markets; Economics > Discussion Papers in Economics > Economics of Information
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Wirtschaft
• Journal of Economic Literature classification: D82, G21, K00
• Language: English