Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships
AbstractPrevious work has claimed that monopoly power facilitates the provision of credit, since monopolists are better able to enforce payment. Here, we argue that if relationship-specific investments are required by borrowers to establish creditworthiness, monopoly power may reduce credit provision because hold up problems ex post will deter borrowers from investing in establishing creditworthiness. Empirically, we examine the relationship between monopoly power and credit provision, using data on the supply relationships of firms in five African countries. Consistent with the upfront investment story, we find that monopoly power is negatively associated with credit provision, and that this correlation is stronger in older supplier relationships. Because the data include several observations per firm, we are able to utilize firm fixed-effects, thus netting out unobserved firm characteristics that may have been driving results in earlier studies.
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Date of creation: Apr 2003
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Find related papers by JEL classification:
- L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-04-27 (All new papers)
- NEP-COM-2003-04-27 (Industrial Competition)
- NEP-FIN-2003-04-27 (Finance)
- NEP-MFD-2003-04-27 (Microfinance)
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