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The authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers. They consider both monopolistic and perf ectly-competitive banks and examine the role of collateral in each ca se. When a bank is a monopolist on the loan side, they find collatera l is never used and asymmetric information results in reduced bank le nding. Under perfect competition, collateral has a useful sorting rol e. Moreover, rationing is possible even with collateral availability and perfectly-elastic deposit supply. In this setting, the authors sh ow co-signers are valuable. Social welfare properties of the monopoly and competitive equilibria are also compared. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Besanko et al. (Thu,) studied this question.