Competition and favoritism in bank loan markets
Yan Dong () and
Pacific-Basin Finance Journal, 2020, vol. 59, issue C
This paper shows that compared to average-looking borrowers, good-looking borrowers have a loan approval rate which is 4 percentage points higher, whereas plain-looking borrowers pay a significantly higher interest rate (1 percentage point higher). However, this beauty premium only exists in concentrated markets where banks have enough market power to discriminate against the plain-looking borrowers or to show favor towards the good-looking. Once competition intensifies, the beauty premium disappears. Therefore, promoting banking market competition could considerably enhance the efficient allocation of credit by mitigating taste-based favoritism.
Keywords: Market structure; Bank loan; Favoritism; Beauty (search for similar items in EconPapers)
JEL-codes: G21 J70 L13 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:59:y:2020:i:c:s0927538x19300824
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