The Impact of the Banking Competition in Funding and Lending Markets on Lending Technology

During the last decades, banks have expanded the use of credit scoring technology to grant loan, challenging traditional relationship lending. I investigate the relationship between banking competition and technological change in lending, and its implications for efficiency. I consider a double Bertrand competition model, where banks compete both in one funding market and in two heterogeneous loan markets, and analyze the competition between banks employing different lending technologies. I show that competition may lead to inefficiency. This happens when a bank overbids in the funding market to enjoy monopoly power in all loan markets, and one of the markets is served by less efficient technology.