Screening, Bidding, and the Loan Market Tightness

Melanie Cao () and Shouyong Shi ()

Center for Financial Institutions Working Papers from Wharton School Center for Financial Institutions, University of Pennsylvania

Abstract: Bank loans are more available and cheaper for new and small businesses in the U.S. in concentrated banking areas than in competitive banking areas. To explain this anomaly, we analyze banks' decisions to screen projects and their subsequent competition in loan provisions. It is shown that, by exacerbating the winner's curse, an increase in the number of banks can reduce banks' screening probability by so much that the number of banks that actively compete in loan provisions falls and the expected loan rate rises. This is the case when the screening cost is low, which induces all active bidders to be informed. The opposite outcome occurs when the screening cost is high, in which case there are su±ciently many uninformed banks in bidding to attenuate the winner's curse. We also brie°y examine policy implications.

Keywords: Loans; Screening; Bidding; Informational externality (search for similar items in EconPapers)
JEL-codes: G21 D44 L15 (search for similar items in EconPapers)
Date: 2000-01
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Related works:
Working Paper: Screening, Bidding, and the Loan Market Tightness (1999)
Working Paper: Screening, Bidding, and the Loan Market Tightness (1999)
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Persistent link: http://EconPapers.repec.org/RePEc:wop:pennin:00-09

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