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Are Transition Countries Overbanked? The Effect of Institutions on Bank Market Entry

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  • Christa Hainz

Abstract

The popular notion that transition countries are overbanked is challenged in this paper. We study the decision for market entry and the optimal number of banks in a Salop model. We show that the amount of collateral, which is necessary to solve the moral hazard problem of finance, depends on the distance between bank and firm as well as the quality of the institutional environment. We analyze how the number of banks decreases as the institutional environment improves. Moreover, we find that market entry is insufficient because new entrants do not consider thoroughly the positive effects of their entry decision on social welfare. Copyright Verein für Socialpolitik and Blackwell Publishing Ltd. 2004.

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Bibliographic Info

Article provided by Verein für Socialpolitik in its journal German Economic Review.

Volume (Year): 5 (2004)
Issue (Month): 2 (05)
Pages: 237-256

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Handle: RePEc:bla:germec:v:5:y:2004:i:2:p:237-256

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References

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  1. Hans Degryse & Steven Ongena, 2002. "Distance, Lending Relationships, and Competition," CSEF Working Papers 80, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  2. Andrzej Bratkowski & Irena Grosfeld & Jacek Rostowski, 2000. "Investment and Finance in "de novo" private firms: Empirical Results from the Czech Republic, Hungary and Poland," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(1), pages 101-116, March.
  3. Schnitzer, Monika, 1998. "Bank Competition and Enterprise restructuring in Transition Economies," CEPR Discussion Papers 2045, C.E.P.R. Discussion Papers.
  4. Kenneth Koford & Adrian E. Tschoegl, 1997. "Problems of Bank Lending in Bulgaria: Information Asymmetry and Institutional Learning," Center for Financial Institutions Working Papers 97-41, Wharton School Center for Financial Institutions, University of Pennsylvania.
  5. Hainz, Christa, 2003. "Bank competition and credit markets in transition economies," Journal of Comparative Economics, Elsevier, vol. 31(2), pages 223-245, June.
  6. N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
  7. Gronberg, Timothy & Meyer, Jack, 1981. "Competitive Equilibria in Uniform Delivered Pricing Models," American Economic Review, American Economic Association, vol. 71(4), pages 758-63, September.
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Cited by:
  1. Jimborean, Ramona, 2009. "The role of banks in the monetary policy transmission in the new EU member states," Economic Systems, Elsevier, vol. 33(4), pages 360-375, December.
  2. Fidrmuc, Jarko, 2006. "Money Demand and Disinflation in Selected CEECs during the Accession to the EU," Discussion Papers in Economics 1232, University of Munich, Department of Economics.

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