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Volume 9, Issue 2

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Asymmetric Information, Bank Lending and Implicit Contracts: Differences between Banks

Niinimäki, Juha-Pekka

Year: 2015   Volume: 9   Issue: 2   Pages: 74-90

Abstract: This paper studies asymmetric information on banks, relationship lending and switching costs. According to the classic theory of relationship banking asymmetric information on borrower types causes an informational lock-in by borrowers: good borrowers are tied to their banks. This paper shows that an informational lock-in effect occurs even if borrowers are identical. Asymmetric information on banks generates an informational lock-in for borrowers. A borrower is tied to the initial bank even if it charges higher loan interest. The borrower is not ready to leave the bank and take a risk that the new bank proves to be even worse.

JEL classification: G21

Keywords: Asymmetric information, banking, relationship lending, bank competition, switching costs

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