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Competition and favoritism in bank loan markets

Hua Cheng, Xue Li, Yan Dong () and Shusen Qi

Pacific-Basin Finance Journal, 2020, vol. 59, issue C

Abstract: 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)
Date: 2020
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DOI: 10.1016/j.pacfin.2019.101214

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Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

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Handle: RePEc:eee:pacfin:v:59:y:2020:i:c:s0927538x19300824