Abstract
This dissertation studies imperfect competition in asymmetric information markets. The current mainstay is associated with the banking industry: the entry of global banks from financial liberalization and how this impacts local markets. Financial liberalization accelerates global banks' entry into new markets where host countries hope to spur investment and economic growth. However, because some global banks struggled with expanding their businesses overseas, they retreated from their global ambitions and exited these new markets. This study demonstrates how difficulties of foreign banks in new markets may emerge due to disadvantages in their ability to assess credit quality compared to that of established domestic banks.
Chapter 1 finds theoretical results that a high-risk profile entrant bank may emerge due to heterogeneous search cost structures in an asymmetric information market. This chapter develops a duopoly banking model where two banks exhibit heterogeneity in screening costs while borrowers have private information about their own probabilities of defaulting on loans. Despite the cost heterogeneity, an equilibrium exists in which two such banks coexist in the market. Specifically, the information-cost advantaged bank orchestrates a cream-skimming strategy which entails lower-price commitments of loan products and higher investigation levels to screen and find low-risk borrowers. In contrast, the information-cost disadvantaged bank chooses a bottom-fishing strategy which consists of higher-priced loan offers with lower investigation levels. This results in high acceptance rates of high-risk borrowers in the foreign bank's loan profile and correspondingly higher default rates. Moreover, this chapter delves deeper into the effects of foreign bank entry in credit markets to derive implications for policy development.
Chapter 2 develops a structural model which applies the banking sector of financially liberalized countries to calibrate and measures the screening cost spread between domestic and foreign banks to see how such informational asymmetries across banks impact the market. On average, foreign banks offer higher interest compared to domestic banks in every credit rating segment. Furthermore, foreign banks favor allocating loans to higher-risk borrowers than domestic banks. This chapter calibrates the supply side of the South Korean retail banking sector for domestic and foreign banks separately and implicitly calibrates each market share. The calibrated model possesses an equilibrium that suggests foreign banks record a higher default loan rates due to approximately 4 times higher screening cost than domestic banks. Nonetheless, foreign bank entry allows extra degrees of freedom so that interest rates are better matched with borrower risk, leading to higher welfare. Thus, based on the results of the model, the policy makers in emerging market economies and financially less-developed countries should reduce the screening cost spread to encourage foreign banks to engage higher investigation levels. Furthermore, reducing the screening cost spread enables the economy to allocate credit to only a good quality of borrowers with lower interest rates and avoid the adverse selection problem of distributing loans to high-risk borrowers and paying high-bankruptcy costs.
This dissertation approach can be applied not only in the banking sector but also in various industries where heterogeneous-characteristic firms compete in an asymmetric information environment such as the labor, insurance, and used-car markets. Chapter 3 discuses possible opportunities for future work.