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What determines banks’ market power? Akerlof versus Herfindahl

Author

Listed:
  • Moshe Kim

    (University of Haifa)

  • Eirik Gaard Kristiansen

    (Norwegian School of Economics and Business Administration)

  • Bent Vale

    (Norges Bank)

Abstract

We introduce a model analyzing how asymmetric information problems in a bank-loan market may evolve over the age of a borrowing firm. The model predicts a life-cycle pattern for banks’interest rate markup. Young firms pay a low or negative markup, thereafter the markup increases until it falls for old firms. Furthermore, the pattern of the life-cycle depends on the informational advantage of the inside bank and when more dispersed borrower information yields fiercer bank competition. By applying a new measure of the informational advantage of inside banks and a large sample of small Nor-wegian firms, we find empirical support for the predicted markup pattern. We disentangle effects of asymmetric information (Akerlof effect)from effects of a concentrated banking market(Herfindahl effect). Our results indicate that the interest rate markups are not influenced by bank market concentration.

Suggested Citation

  • Moshe Kim & Eirik Gaard Kristiansen & Bent Vale, 2005. "What determines banks’ market power? Akerlof versus Herfindahl," Working Paper 2005/8, Norges Bank.
  • Handle: RePEc:bno:worpap:2005_08
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    References listed on IDEAS

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    Cited by:

    1. Bonini, Stefano & Dell'Acqua, Alberto & Fungo, Matteo & Kysucky, Vlado, 2016. "Credit market concentration, relationship lending and the cost of debt," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 172-179.
    2. Cerqueiro, Geraldo & Degryse, Hans & Ongena, Steven, 2011. "Rules versus discretion in loan rate setting," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 503-529, October.
    3. Eirik Gaard Kristiansen, 2005. "Strategic bank monitoring and firms’ debt structure," Working Paper 2005/10, Norges Bank.
    4. Khan, Mehwish Aziz & Kayani, Ferheen & Javid, Attiya Yasmin, 2011. "Effect of Mergers and Acquisitions on Market Concentration and Interest Spread," MPRA Paper 37311, University Library of Munich, Germany.

    More about this item

    Keywords

    Banking; risk-pricing; lock-in;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality

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