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
• Keywords: Collateralization, screening, incentives, bank competition
• Faculties: Economics; Economics > Munich Discussion Papers in Economics; Economics > Munich Discussion Papers in Economics > Financial Markets; Economics > Munich Discussion Papers in Economics > Economics of Information; Economics > Chairs > Seminar for Comparative Economics
• Subjects: 300 Social sciences > 300 Social sciences, sociology and anthropology; 300 Social sciences > 330 Economics
• JEL Classification: D82, G21, K00
• Language: English