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Bank Competition and Collateral: Theory and Evidence
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Bank Competition and Collateral: Theory and Evidence

Author

Listed:
  • Christa Hainz

    (University of Munich)

  • Laurent Weill

    (Laboratoire de Recherche en Gestion et Economie, Institut d'Etudes Politiques, Strasbourg)

  • Christophe J. GODLEWSKI

    (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)

Abstract

We investigate the impact of bank competition on the use of collateral in loan contracts. We develop a theoretical model incorporating information asymmetries in a spatial competition framework where banks choose between screening the borrower and asking for collateral. We show that the presence of collateral is more likely when bank competition is low. We then test this prediction empirically on a sample of bank loans from 70 countries. We perform logit regressions of the presence of collateral on bank competition, measured by the Lerner index. Our empirical tests corroborate the theoretical predictions that bank competition reduces the presence of collateral. These findings survive several robustness checks.

Suggested Citation

  • Christa Hainz & Laurent Weill & Christophe J. GODLEWSKI, 2008. "Bank Competition and Collateral: Theory and Evidence," Working Papers of LaRGE Research Center 2008-19, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2008-19
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    More about this item

    Keywords

    Collateral; Bank Competition; Asymmetric information.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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