The Social Cost of a Credit Monopoly
AbstractBanks provide credit and take deposits. Whereas a high price in the credit market increases banks’ retained earnings and attracts more deposits, it reduces lending if borrowers are sufficiently poor to be tempted by diversion. Thus optimal bank market structure trades off the benefits of monopoly banking in attracting deposits against losses due to tighter credit. The model shows that market structure is irrelevant if both banks and borrowers lack resources. Monopoly banking induces tighter credit rationing if borrowers are poor and banks are wealthy, and increases lending if borrowers are wealthy and banks lack resources. The results indicate that improved legal protection of creditors is a more efficient policy choice than legal protection of depositors, and that subsidies to firms lead to better outcomes than subsidies to banks. There are also likely to be sizable gains from promoting bank competition in developing countries.
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Bibliographic InfoPaper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 422.
Date of creation: 2011
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-11-01 (All new papers)
- NEP-COM-2011-11-01 (Industrial Competition)
- NEP-MFD-2011-11-01 (Microfinance)
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LSE Research Online Documents on Economics
24940, London School of Economics and Political Science, LSE Library.
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