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Adverse Selection as a Barrier to Entry in the Banking Industry
Abstract
Banks offering credit to borrowers are faced with uncertainty about their creditworthiness. If banks obtain information about borrowers after lending to them, they are able to reject riskier borrowers when refinancing. Potential entrant banks will face an adverse-selection problem stemming from their inability to distinguish new borrowers from old borrowers who have been rejected by their previous bank. We analyze the effects of asymmetric information on the market structure of the banking industry. We characterize the equilibrium under Bertrand competition with two banks, and show than an equilibrium where a third bank enters does not exist (blockaded entry).
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Citations
Cited by
Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios*
Acharya, V. V., Hasan, I., & Saunders, A. (2006) · The Journal of Business · doi:10.1086/500679 · Cited by 699
Banks and innovation: Microeconometric evidence on Italian firms☆
BENFRATELLO, L., SCHIANTARELLI, F., & SEMBENELLI, A. (2008) · Journal of Financial Economics · doi:10.1016/j.jfineco.2008.01.001 · Cited by 554
Competition, Adverse Selection, and Information Dispersion in the Banking Industry: Table 1
Marquez, R. (2002) · Review of Financial Studies · doi:10.1093/rfs/15.3.901 · Cited by 417
Self-citationBank competition and firm creation
Bonaccorsi di Patti, E., & Dell'Ariccia, G. (2004) · Journal of Money, Credit, and Banking · doi:10.1353/mcb.2004.0011 · Cited by 399
Self-citationGorton, G., & Winton, A. (2003) · Handbook of the Economics of Finance · doi:10.1016/s1574-0102(03)01012-4 · Cited by 304
Metadata
- Authors
- Dell'Ariccia, G., Friedman, E., & Marquez, R.
- Venue
- The RAND Journal of Economics
- Publisher
- Wiley
- Published
- 1999
- Volume
- 30
- Issue
- 3
- Pages
- 515
- ISSN
- 0741-6261 (ISSN-L)
- OpenAlex
- W2074184863
- Cited by
- 342
- References
- 0
- FWCI
- 23.24
- Type
- journal article
- Language
- en
- Open access
- closed
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