Heterogeneous Banking Efficiency : Allocative Distortions and Lending Fluctuations
AbstractThis paper is a first attempt to connect the heterogeneity in bank efficiency with lending fluctuations and allocation efficiency: there is a trade-off between the two in the presence of heterogeneity in bank monitoring efficiency. The mechanism at hand is twofold. (a) First the rent extracted by the most efficient bank distorts incentives of entrepreneurs to undertake efforts. (b) Second banks specialising on contracts that do not include monitoring feature less cyclical fluctuations of aggregate lending. This has clear implications: (i) the presence of banking heterogeneity decreases firms' average productivity as it increases adverse selection by entrepreneurs as well as favours rent extractions by banks; (ii) an individual bank featuring a lower cyclicality signals a lower efficiency in its monitoring abilities; (iii) a heterogeneous banking system featuring a lower cyclicality of aggregate lending might not be desirable as it may come along with allocative and incentives distortions.
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Date of creation: Nov 2013
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Banking heterogeneity ; Moral hazard ; Adverse selection ; Endogenous market segmentation ; Allocation efficiency ; Lending cycle;
Other versions of this item:
- Duprey , T., 2013. "Heterogeneous Banking Efficiency: Allocative Distortions and Lending Fluctuations," Working papers, Banque de France 464, Banque de France.
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-12-06 (All new papers)
- NEP-BAN-2013-12-06 (Banking)
- NEP-CTA-2013-12-06 (Contract Theory & Applications)
- NEP-EFF-2013-12-06 (Efficiency & Productivity)
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