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Learning about Competitors: Evidence from SME Lending

Darmouni, Olivier and Sutherland, Andrew (2018): Learning about Competitors: Evidence from SME Lending.

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We study how small and medium enterprise (SME) lenders react to information about their competitors’ contracting decisions. To isolate this learning from lenders’ joint reaction to unobserved common shocks to fundamentals, we exploit the staggered entry of lenders into an information sharing platform. Upon joining the platform, lenders adjust their contract terms toward what others are offering. This effect is mediated by market structure: lenders with higher market share or operating in concentrated markets react less to competitors’ information. Contract terms and outcomes are thus shaped by the availability of competitor information and not just by borrower or lender fundamentals.

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