We develop a dynamic general equilibrium model of capital accumulation where credit is intermediated by banks operating in a Cournot oligopoly. The number of banks affects capital accumulation through two channels. First, it affects the quantity of credit available to entrepreneurs. Second, it affects banks' decisions to collect costly information about entrepreneurs, and thus determines the efficiency of the credit market. We show that under plausible conditions, the market structure that maximizes the economy's steady-state income per capita is neither a monopoly nor competition, but an intermediate oligopoly. Moreover, the credit market splits in two segments: one in which loans are screened and only high quality entrepreneurs obtain credit, and one in which banks extend credit indiscriminately to all entrepreneurs. The relative size of the two segments depends on the market power of banks and evolves endogenously along the path of capital accumulation. We thus obtain the prediction that the banking sector becomes more sophisticated as the economy develops.
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Paper provided by Duke University, Department of Economics in its series Working Papers with number
00-19.
Length: Date of creation: 2000 Date of revision: Handle: RePEc:duk:dukeec:00-19
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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.:
Milton Harris & Bengt Holmstrom, 1981.
"A Theory of Wage Dynamics,"
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Emilia Bonaccorsi di Patti & Giovanni Dell'Ariccia, 2000.
"Bank competition and firm creation,"
Proceedings,
Federal Reserve Bank of Chicago, issue May, pages 132-161.
Other versions:
Dixit, Avinash K, 1986.
"Comparative Statics for Oligopoly,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
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