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Asymmetric information and imperfect competition in the loan market
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Crawford, Gregory S., Pavanini, Nicola and Schivardi, Fabiano (2013) Asymmetric information and imperfect competition in the loan market. Working Paper. Coventry, UK: Department of Economics, University of Warwick. CAGE Online Working Paper Series, Volume 2013 (Number 167).
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Text (Working paper)
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
We measure the consequences of asymmetric information in the Italian market for small business
lines of credit. Exploiting detailed, proprietary data on a random sample of Italian firms, the population
of medium and large Italian banks, individual lines of credit between them, and subsequent individual
defaults, we estimate models of demand for credit, loan pricing, loan use, and firm default based on
the seminal work of Stiglitz and Weiss (1981) to measure the extent and consequences of asymmetric
information in this market. While our data include a measure of observable credit risk comparable to that
available to a bank during the application process, we allow firms to have private information about the
underlying riskiness of their project. This riskiness influences banks’ pricing of loans as higher interest
rates attract a riskier pool of borrowers, increasing aggregate default probabilities. Data on default, loan
size, demand, and pricing separately identify the distribution of private riskiness from heterogeneous
firm disutility from paying interest. Preliminary results suggest evidence of asymmetric information,
separately identifying adverse selection and moral hazard. We use our results to quantify the impact of
asymmetric information on pricing and welfare, and the role imperfect competition plays in mediating
these effects.
Item Type: | Working or Discussion Paper (Working Paper) |
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Subjects: | H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance |
Divisions: | Faculty of Social Sciences > Economics |
Library of Congress Subject Headings (LCSH): | Business enterprises -- Italy, Information asymmetry , Credit -- Management, Banks and banking -- Italy, Competition -- Italy |
Series Name: | CAGE Online Working Paper Series |
Publisher: | Department of Economics, University of Warwick |
Place of Publication: | Coventry, UK |
Official Date: | September 2013 |
Volume: | Volume 2013 |
Number: | Number 167 |
Number of Pages: | 30 |
Status: | Not Peer Reviewed |
Publication Status: | Published |
Funder: | University of Warwick |
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