Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Thursday, April 22, 2021

The Role of Regulation and Competition in Information Production and Credit Allocation: Evidence from Small Business Lending

The Role of Regulation and Competition in Information Production and Credit Allocation: Evidence from Small Business Lending

Panagiotis Avramidis

Alba Graduate Business School, The American College of Greece

Konstantinos Serfes

Drexel University

Kejia Wu

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Abstract

Do policies that promote credit access have an impact on targeted borrowers? To address this question we develop a theoretical model of information production, regulation and bank competition and test empirically its predictions by examining the impact of the Community Reinvestment Act's (CRA) lending program on small businesses. Our analysis reveals that, on average, the CRA eligibility-induced surge of loans leads to an improvement in the credit score of small businesses. However, we observe no improvement in the credit score of small businesses in markets with high bank competition intensity. We suggest that high competition erodes bank's incentives for information production. Therefore, blanket interventions that stimulate credit access to targeted borrowers may not uniformly improve credit allocation across all local markets. We recommend that government interventions aiming to increase credit access should also enact policies that lower information acquisition costs, especially in high bank competition markets.

https://lawprofessors.typepad.com/antitrustprof_blog/2021/04/the-role-of-regulation-and-competition-in-information-production-and-credit-allocation-evidence-from.html

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