Working Paper: CEPR ID: DP10473
Authors: Gregory S. Crawford; Nicola Pavanini; Fabiano Schivardi
Abstract: We study the effects of asymmetric information and imperfect competition in the market for small business lines of credit. We estimate a structural model of credit demand, loan use, pricing, and firm default using matched firm-bank data from Italy. We find evidence ofadverse selection in the form of a positive correlation between the unobserved determinants of demand for credit and default. Our counterfactual experiments show that while increases in adverse selection increase prices and defaults on average, reducing credit supply, banks? market power can mitigate these negative effects.
Keywords: asymmetric information; credit markets; imperfect competition; lending markets
JEL Codes: D82; G21; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unobserved riskiness of firms (G32) | likelihood of default (G33) |
| adverse selection (D82) | prices (P22) |
| adverse selection (D82) | defaults (Y60) |
| market power (L11) | price increase associated with adverse selection (D82) |
| adverse selection (D82) | likelihood of default (G33) |