DP16258 Information Technology and Lender Competition
We study how information technology (IT) affects competition and stability of lenders, investment, and welfare in a spatial model. While an IT improvement spurs entrepreneurs’ investment, other effects depend on whether the IT weakens the influence of lender–borrower distance on monitoring costs. If so, lending competition intensifies, which can reduce the profitability and stability of lenders and social welfare. Otherwise, competition intensity does not vary, bringing positive effects for lenders and welfare. IT investments of a bank and a fintech tend to be strategic complements. Lenders will invest excessively in IT, eliminating differentiation, if it is cheap enough. If not, the different types of IT investment co-move in response to shocks. Our results are consistent with received empirical work on lending to SMEs.
