Exclusion, competition, and regulation in the retail loan market

Arie Melnik, Oz Shy

Research output: Contribution to journalArticlepeer-review


Exclusion of borrowers from credit markets became a primary concern for regulators during the recovery from the recent recession. The paper analyzes loan-making institutions that set both interest rates and minimum credit requirements. We propose analytical measures of the degree of borrower exclusion from receiving loans. We analyze five market structures: Single lender, regulated interest rate, entry, interest rate discrimination, and highly-competitive lenders. Interest rate regulation improves total welfare relative to a single lender market. However, entry of a second lender reduces exclusion and generates higher total welfare. In the absence of fixed costs, perfect and Bertrand competition are optimal.

Original languageEnglish
Pages (from-to)189-198
Number of pages10
JournalJournal of Banking and Finance
StatePublished - 1 Mar 2015

Bibliographical note

Funding Information:
We thank two anonymous referees, the participants at the 2013 AIDEA-FINEST conference in Lecce, Mitch Berlin, Gabriella Chiesa, Stuart Greenbaum, Giovanna Nicodano, Bruno Parigi, Alessandro Sembenelli, and Greg Udell for insightful conversations. Research support from ICER in Torino is gratefully acknowledged. The views expressed in this paper are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System.

Publisher Copyright:
© 2014 Elsevier B.V.


  • Credit quality
  • Exclusion of borrowers
  • Interest rate regulation
  • Lending

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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