Information and bank credit allocation

Costly information, entry, and credit access

“…Rather than look at in increase in competition, however, this paper analyzes how the introduction of lenders with a different comparative advantage into an already competitive economy affects equilibrium contracts. This is similar to Dell'Ariccia and Marquez [22] and Sengupta [51], which demonstrate that this type of entry can induce segmented credit markets. However, by assuming that incumbent lenders have perfect information about borrower types, neither of these papers is able to shed light on why segmented markets might induce declines in credit access.…”

“…Therefore, their entry can increase net output by inducing these firms to take on larger projects, but at the same time, net output may be declining for other firms as the financial contracts available to these firms will differ in a separating equilibrium. This potential for a decline in credit access and output is not found in existing models of competition between lenders with different comparative advantages in screening; these models find that entry will improve credit access for all firms (Dell'Ariccia and Marquez [22], Sengupta [51]). 15 At the same time, the model suggests that the inconclusive evidence pertaining to financial liberalization may also be the consequence of differences in the underlying fundamentals.…”

“…15 The key reason for this different outcome is their assumption that incumbent lenders have perfect information about borrower types, whereas entering lenders have no information. The importance of these assumptions can be illustrated using a modified version of the model, where, similar to Dell'Ariccia and Marquez [22], screening is always ineffectual for a fraction α of the bad and average firms. Versions of Propositions 1-3 will still hold in this modified model, but as  goes to zero and *  goes to infinity, the impact of foreign entry instead resembles that of Dell'Ariccia and Marquez [22] in that no firm is worse off because of segmentation.…”

“…In the separating equilibrium, domestic lenders may invest in screening expertise so as to retain a competitive advantage among average firms, and maintaining this competitive advantage will be possible when foreign lenders' disadvantage in screening is sufficiently large, such that  *   r  r * . 22 If the baseline cost of screening,  , is less than ( ) R r e c e    , it will be feasible for domestic lenders to invest in screening capacity e and offer screened contracts to average firms following foreign entry. …”

Lending to uncreditworthy borrowers

“…al, 1999, Dell'Ariccia andMarquez, 2004). 9 An interesting feature of all these models is that the informed 7 Sengupta (2007) examines a problem of entry in which lenders compete over the incumbent's clients only.…”