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Can Competition in the Credit Market be Excessive?

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Author Info
Caminal, Ramón
Matutes, Carmen

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Abstract

We study the welfare implications of market power in a model where banks choose between credit rationing and monitoring in order to alleviate an underlying moral-hazard problem. We show that the effect of banks’ market power on social welfare is the result of two countervailing effects. On the one hand, higher market power increases lending rates, worsens the borrower’s incentive problem and investment is further reduced below the efficient level. On the other hand, higher market power induces banks to exert higher monitoring effort and reduces the frequency of credit rationing. Whenever the second effect dominates, it is socially optimal to provide banks with some degree of market power.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1725.

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Date of creation: Oct 1997
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Handle: RePEc:cpr:ceprdp:1725

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Related research
Keywords: Credit Rationing; market power; Monitoring; Moral Hazard;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. J. Miguel Villas-Boas & Udo Schmidt-Mohr, 1999. "Oligopoly with Asymmetric Information: Differentiation in Credit Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 375-396, Autumn. [Downloadable!] (restricted)
  2. Bacchetta, Philippe & Caminal, Ramon, 2000. "Do capital market imperfections exacerbate output fluctuations?," European Economic Review, Elsevier, vol. 44(3), pages 449-468, March. [Downloadable!] (restricted)
    Other versions:
  3. Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May. [Downloadable!] (restricted)
    Other versions:
  4. Allen Berger & David Humphrey, 1994. "Bank Scale Economies, Mergers, Concentration, and Efficiency: The U.S. Experience," Center for Financial Institutions Working Papers 94-25, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  5. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December. [Downloadable!] (restricted)
  6. David Besanko & Anjan V. Thakor, 2004. "Relationship Banking, Deposit Insurance and Bank Portfolio Choice," Finance 0411046, EconWPA. [Downloadable!]
  7. Besanko, David & Kanatas, George, 1993. "Credit Market Equilibrium with Bank Monitoring and Moral Hazard," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(1), pages 213-32. [Downloadable!] (restricted)
  8. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April. [Downloadable!] (restricted)
  9. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January. [Downloadable!] (restricted)
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  10. Vesa Kanniainen & Rune Stenbacka, 1997. "Project Monitoring and Banking Competition under Adverse Selection," CIG Working Papers FS IV 97-23, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Oct 1998. [Downloadable!]
  11. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March. [Downloadable!] (restricted)
  12. Bester,Helmut Hellwig,Martin, 1987. "Moral hazard and equilibrium credit rationing: An overview of the issues," Discussion Paper Serie A 125, University of Bonn, Germany.
  13. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September. [Downloadable!] (restricted)
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  14. Thakor, Anjan V., 2000. "Relationship Banking," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 3-5, January. [Downloadable!] (restricted)
  15. Michael H. Riordan, 1992. "Competition and Bank Performance: A Theoretical Perspective," Papers 0026, Boston University - Industry Studies Programme.
  16. Allen N. Berger & Timothy H. Hannan, 1993. "Using efficiency measures to distinguish among alternative explanations of the structure-performance relationship in banking," Finance and Economics Discussion Series 93-18, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alan D. Morrison, 2000. "Regulator Reputation and Optimal Banking Competition Policy," OFRC Working Papers Series 2000fe07, Oxford Financial Research Centre. [Downloadable!]
  2. Luz Adriana Flórez & Carlos Esteban Posada & José Fernando Escobar, 2004. "El Crédito Y Sus Factores Determinantes: El Caso Colombiano (1990-2004)," BORRADORES DE ECONOMIA 002482, BANCO DE LA REPÚBLICA. [Downloadable!]
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  3. Luz Adriana Flórez & Carlos Esteban Posada & José Fernando Escobar, 2005. "Crédito Y Depósitos Bancariosen Colombia (1990-2004): Una Relación De Largo Plaz," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE. [Downloadable!]
  4. Pekka Mannonen, 2001. "Advancing information technology and financial intermediation," Discussion Papers 770, The Research Institute of the Finnish Economy. [Downloadable!]
  5. Ralf Elsas & Jan Pieter Krahnen, 2003. "Universal Banks and Relationships with Firms," CFS Working Paper Series 2003/20, Center for Financial Studies. [Downloadable!]
  6. Ramon Caminal, 2002. "Taxation of banks: A theoretical framework," UFAE and IAE Working Papers 525.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
  7. Mitchell Berlin & Alexander Butler, 2002. "Collateral and competition," Working Papers 02-22, Federal Reserve Bank of Philadelphia. [Downloadable!]
  8. Pekka Mannonen, 2002. "The Strategic Response of Banks to an Exogenous Positive Information Shock in the Credit Markets," Discussion Papers 830, The Research Institute of the Finnish Economy. [Downloadable!]
  9. Vesa Kanniainen & Rune Stenbacka, 1997. "Project Monitoring and Banking Competition under Adverse Selection," CIG Working Papers FS IV 97-23, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Oct 1998. [Downloadable!]
  10. Fiona, Tregenna, 2006. "An empirical investigation of the effects of concentration on profitability among US banks," MPRA Paper 13731, University Library of Munich, Germany, revised 2009. [Downloadable!]
  11. Félix J. López Iturriaga, 2005. "Debt ownership structure and legal system: an international analysis," Applied Economics, Taylor and Francis Journals, vol. 37(3), pages 355-365, February. [Downloadable!] (restricted)
  12. Reint Gropp & Sandrine Corvoisier, 2001. "Bank concentration and retail interest rates," Working Paper Series 072, European Central Bank. [Downloadable!]
    Other versions:
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