Insider rates versus outsider rates in lending

Lamont K. Black

Finance Research Letters, 2011, vol. 8, issue 4, 180-187

Abstract: When information asymmetries exist between lenders, an uninformed outside bank that competes with an informed inside bank faces a winner’s curse. This paper examines a benchmark model’s prediction for interest rates. Although the outside bank wins more bad firms, the inside bank extracts rents from good firms and the outside bank underbids for bad firms. An analytical solution reveals the surprising result that the average interest rate paid to the inside bank following bidding outcomes can be higher than the average interest rate paid to the outside bank.

Keywords: Banking relationships; Competition under asymmetric information; Informational lock-in; Auctions (search for similar items in EconPapers)
JEL-codes: C72 D44 D82 G21 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:8:y:2011:i:4:p:180-187

DOI: 10.1016/j.frl.2011.08.002

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