Asymmetric Information and Imperfect Competition in Lending Markets

Abstract

We measure the consequences of asymmetric information and imperfect competition in the Italian lending market. We show that banks' optimal price response to an increase in adverse selection varies with competition. Exploiting matched data on loans and defaults, we estimate models of demand for credit, loan use, pricing, and firm default. We find evidence of adverse selection and evaluate its importance. While indeed prices rise in competitive markets and decline in concentrated ones, the former effect dominates, suggesting that while market power can mitigate the adverse effects of asymmetric information, mainstream concerns about its effects survive with imperfect competition. * We thank

Do Marginal Products Differ from User Costs? Micro-Level Evidence from Italian Firms

“…Thus, we would like to construct a plausible estimate of their user cost. There is ample empirical evidence, corroborated by the analysis of Section 5, that banks set their rates based on a limited number of observable characteristics (Ja ee and Modigliani 1969;Crawford et al, 2016). Moreover, it is well established that financing of small and medium firms -the lion share in our data -is tied to their local credit markets as proximity between borrowers and lenders facilitates information acquisition (Petersen and Rajan, 2002;Degryse and Ongena 2005).…”

“…A body of evidence in the consumer lending market has corroborated these predictions (Ausubel 1991;Adams et al 2009;Einav et al 2012;Agarwal et al 2017). Yet besides a few noteworthy exceptions, empirical evidence for firms remains scant, mostly due to the lack of longitudinal micro-level data that provide information on the borrowing costs paid by individual on firms (Hannan and Berger 1991;Petersen and Rajan 1994;Crawford et al 2016). 9 The analysis of the economic e ects of firing costs in Hopenhayn and Rogerson (1993) is one of the earliest studies of misallocation due to regulation.…”

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