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

Christa Hainz

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

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.

Keywords: collateralization; screening; incentives; bank competition (search for similar items in EconPapers)
JEL-codes: D82 G21 K00 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-ban, nep-bec, nep-com and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:trf:wpaper:216

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