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What determines banks’ market power? Akerlof versus Herfindahl

  • Moshe Kim

    (University of Haifa)

  • Eirik Gaard Kristiansen

    (Norwegian School of Economics and Business Administration)

  • Bent Vale

    (Norges Bank)

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.

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Paper provided by Norges Bank in its series Working Paper with number 2005/8.

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Length: 38 pages
Date of creation: 12 Sep 2005
Date of revision:
Handle: RePEc:bno:worpap:2005_08
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