DP16258 Information Technology and Lender Competition
We study how information technology (IT) affects lender competition, entrepreneurs’ investment, and welfare in a spatial model. The effects of an IT improvement depend on whether it weakens the influence of lender–borrower distance on monitoring costs. If it does, it has a hump-shaped effect on entrepreneurs’ investment and social welfare. If not, competition intensity does not vary, improving lender profits, entrepreneurs’ investment, and social welfare. When entrepreneurs’ moral hazard problem is severe, IT-induced competition is more likely to reduce investment and welfare. We also find that price discrimination is not welfare-optimal and that lenders will invest excessively in IT if it is cheap enough. Our results are consistent with received empirical work on lending to SMEs.
