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The role of credit market competition on lending strategies and on capital accumulation

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Nicola Cetorelli

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Abstract

This paper examines the role of credit market competition in the dynamic of capital accumulation. It is shown that the lending relationship problem which seems to characterize competitive credit markets can have negative repercussions for capital accumulation. In contrast, monopoly power in banking can be beneficial for growth. A monopolist bank may lower the equilibrium quantity of credit, but it allows a better allocation of credit supply. This result reconciles with the available empirical evidence and suggests a positive role for monopoly power in banking, especially for developing countries.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series, Issues in Financial Regulation with number WP-97-14.

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Date of creation: 1997
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Handle: RePEc:fip:fedhfi:wp-97-14

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Keywords: Credit Capital

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. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August. [Downloadable!] (restricted)
  2. Mayer, Colin, 1988. "New issues in corporate finance," European Economic Review, Elsevier, vol. 32(5), pages 1167-1183, June. [Downloadable!] (restricted)
    Other versions:
  3. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring. [Downloadable!] (restricted)
  4. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September. [Downloadable!] (restricted)
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  5. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July. [Downloadable!] (restricted)
  6. Diamond, Douglas W, 1989. "Reputation Acquisition in Debt Markets," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 828-62, August. [Downloadable!] (restricted)
  7. 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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  8. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 195-209, April. [Downloadable!] (restricted)
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  9. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August. [Downloadable!] (restricted)
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  10. Colin Mayer, 1996. "Corporate Governance, Competition and Performance," OECD Economics Department Working Papers 164, OECD Economics Department. [Downloadable!]
  11. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October. [Downloadable!] (restricted)
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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. Nicola Cetorelli & Pietro F. Peretto, 2000. "Oligopoly banking and capital accumulation," Working Paper Series WP-00-12, Federal Reserve Bank of Chicago. [Downloadable!]
    Other versions:
  2. Bossone, Biagio, 1999. "Financial development and industrial capital accumulation," Policy Research Working Paper Series 2201, The World Bank. [Downloadable!]
  3. Pere Gomis-Porqueras & Benoit Julien, 2007. "Market Structure and the Banking Sector," Economics Bulletin, Economics Bulletin, vol. 4(24), pages 1-9. [Downloadable!]
  4. Mark G. Guzman, 1999. "Bank structure, capital accumulation and growth: a simple macroeconomic model," Working Papers 99-07, Federal Reserve Bank of Dallas. [Downloadable!]
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