Bank discrimination in transition economies: ideology, information, or incentives?

This paper analyzes bank discrimination against private firms in a transition country. Theoretically, we show that banks may discriminate for non-profit reason, but that this discrimination diminishes with the incentives and human capital of bank managers. Employing matching bank-firm data from China, we examine empirically the extent, sources and consequences of discrimination. The survey design allows us to disentangle sample truncation, omitted variable bias, and endogeneity issues. Our empirical findings confirm the theoretical predictions, and also indicate that, as a result of discrimination, private firms resort to more expensive trade credits. (C) 2003 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.