Banks play a central role in financing and monitoring firms in transition economies. This study examines how bank competition affects the efficiency of credit allocation; monitoring of firms; and the firms' restructuring effort. In our model, banks compete to finance an investment project with uncertain return. By screening the firm a bank learns about its profitability. Surprisingly, it is found that an increase in bank competition need not reduce a bank's screening incentive even though it lowers its expected profits. Furthermore, competition has a positive impact on the firms restructuring efforts. This suggests a positive role for bank competition in transition economies.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
2013.
Find related papers by JEL classification: D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets P31 - Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions
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Christa Hainz, 2008.
"Bank competition - When is it Goog?,"
Discussion Papers
244, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
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