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Do Public Banks have a Competitive Advantage?

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  • Astrid Matthey

Abstract

Private banks often blame state guarantees to distort competition by giv- ing public banks the advantage of lower funding costs. In this paper I show that if borrowers perceive the public bank as supporting economic develop- ment, private banks may be able to separate firms by self selection, enter the market, and obtain profits in equilibrium despite their cost disadvantage. The public bank's competitive advantage may be offset, independently of what its true objective function is. Even perfect competition between private banks does not lead to zero profits.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-010.

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Length: 21 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2008-010

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Keywords: public banks; state guarantee; self-selection;

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References

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  1. Alejandro Micco & Ugo Panizza & Mónica Yañez, 2004. "Bank Ownership and Performance," IDB Publications 6685, Inter-American Development Bank.
  2. Mathias Dewatripont & Eric Maskin, 1995. "Credit and efficiency in centralized and decentralized economies," ULB Institutional Repository 2013/9603, ULB -- Universite Libre de Bruxelles.
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  5. Chemmanur, Thomas J & Fulghieri, Paolo, 1994. "Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt," Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 475-506.
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  7. Fulghieri, P. & Nagarajan, S., 1992. "On the Strategic Role of High Leverage in Entry Deterrence," Papers 92-10, Columbia - Graduate School of Business.
  8. Johnson, Shane A., 1997. "An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 47-69, March.
  9. Manishi Prasad & Peter Wahlqvist & Rich Shikiar & Ya-Chen Tina Shih, 2004. "A," PharmacoEconomics, Springer Healthcare | Adis, vol. 22(4), pages 225-244.
  10. Houston, Joel & James, Christopher, 1996. " Bank Information Monopolies and the Mix of Private and Public Debt Claims," Journal of Finance, American Finance Association, vol. 51(5), pages 1863-89, December.
  11. Robert Bichsel & Christian Spielmann, 2004. "State-owned Banks as Competition Enhancers, or the Grand Illusion," Industrial Organization 0407003, EconWPA.
  12. Jean-Pierre Benoit, 1984. "Financially Constrained Entry in a Game with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(4), pages 490-499, Winter.
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Cited by:
  1. Höwer, Daniel, 2013. "Corporate main bank decision," ZEW Discussion Papers 13-018, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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