Information technology and lender competition

Abstract

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 lenders’ price discrimination is not welfare-optimal. Our results are consistent with received empirical work on lending to SMEs.