Credit market structure and strategic collateral provision

In a simple lending model with informational asymmetry, we investigate the effect of bank market structure on the amount of collateral provided by firms. We analyze the strategic decision of a potential entrepreneur regarding the amount of wealth to pledge as collateral to secure a loan. The novel result is that the equilibrium collateral can be lower in a monopoly market than under perfect competition. A policy intervention designed to enhance lending is always Pareto-improving in a monopoly but not in a competitive banking industry, even though the associated policy costs are lower in the latter setting.