Competition between Arm's Length and Relational Lenders : Who Wins the Contest?

Using geo-coded data with location of bank branches and borrowers we study the effect of bank competition on lending. The impact of competition depends on the incumbent's and the entrant's lending technologies. The addition of a relational lenders branch increases the probability of exit from and reduces the size of loans issued by all types of incumbents, while the opening of a branch by an arm's length lender only affects the probability of exit from arm's length incumbents. We believe relational lenders can compete more effectively by extracting and using private information unavailable to arm’s length entrants