Screening, Bidding, and the Loan Market Tightness

Bank loans are more available and cheaper for new and small businesses inthe U.S. in concentrated banking areas than in competitive banking areas. Weexplain this anomaly by analyzing banks' decisions to screen projects andtheir competition in loan provisions. It is shown that, by exacerbating thewinner's curse, an increase in the number of banks can reduce banks'screening probability by so much that the number of banks that activelycompete in loan provisions falls and the expected loan rate rises. This isthe case when the screening cost is low, which induces all active bidders tobe informed. The opposite outcome occurs when the screening cost is high, inwhich case there are sufficiently many uninformed banks in bidding toattenuate the winner's curse. We also examine the social optimum