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Oligopoly Banking and Capital Accumulation

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  • Cetorelli, Nicola
  • Peretto, Pietro F.

Abstract

We develop a dynamic general equilibrium model of capital accumulation where credit is intermediated by banks operating in a Cournot oligopoly. The number of banks affects capital accumulation through two channels. First, it affects the quantity of credit available to entrepreneurs. Second, it affects banks' decisions to collect costly information about entrepreneurs, and thus determines the efficiency of the credit market. We show that under plausible conditions, the market structure that maximizes the economy's steady-state income per capita is neither a monopoly nor competition, but an intermediate oligopoly. Moreover, the credit market splits in two segments: one in which loans are screened and only high quality entrepreneurs obtain credit, and one in which banks extend credit indiscriminately to all entrepreneurs. The relative size of the two segments depends on the market power of banks and evolves endogenously along the path of capital accumulation. We thus obtain the prediction that the banking sector becomes more sophisticated as the economy develops.

Suggested Citation

  • Cetorelli, Nicola & Peretto, Pietro F., 2000. "Oligopoly Banking and Capital Accumulation," Working Papers 00-19, Duke University, Department of Economics.
  • Handle: RePEc:duk:dukeec:00-19
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    Cited by:

    1. Pietro Alessandrini & Luca Papi & Alberto Zazzaro, 2003. "Banche, territorio e sviluppo," Moneta e Credito, Economia civile, vol. 56(221), pages 3-43.
    2. Robert DeYoung & William Hunter & Gregory Udell, 2004. "The Past, Present, and Probable Future for Community Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 25(2), pages 85-133, April.
    3. Pietro Alessandrini & Luca Papi & Alberto Zazzaro, 2003. "Banks, regions and development," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 56(224), pages 23-55.
    4. repec:ebl:ecbull:v:4:y:2007:i:24:p:1-9 is not listed on IDEAS
    5. Mariarosaria Agostino & Francesco Trivieri, 2010. "Is banking competition beneficial to SMEs? An empirical study based on Italian data," Small Business Economics, Springer, vol. 35(3), pages 335-355, October.
    6. Lagoarde-Segot, Thomas & Leoni, Patrick L., 2013. "Pandemics of the poor and banking stability," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4574-4583.
    7. Carol Ann Northcott, 2004. "Competition in Banking: A Review of the Literature," Staff Working Papers 04-24, Bank of Canada.
    8. Nicola Cetorelli, 2004. "Real effects of bank competition," Proceedings, Federal Reserve Bank of Cleveland, pages 543-562.
    9. Nicola Cetorelli, 2001. "Does bank concentration lead to concentration in industrial sectors?," Working Paper Series WP-01-01, Federal Reserve Bank of Chicago.
    10. Turk Ariss, Rima, 2010. "On the implications of market power in banking: Evidence from developing countries," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 765-775, April.
    11. Beck, Thorsten & Demirguc-Kant, Asl' & Maksimovic, Vojislav, 2003. "Bank competition, financing obstacles, and access to credit," Policy Research Working Paper Series 2996, The World Bank.
    12. Deidda, Luca & Fattouh, Bassam, 2005. "Concentration In The Banking Industry And Economic Growth," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 198-219, April.
    13. Pascal Belan & Philippe Michel & Bertrand Wigniolle, 2007. "Capital Accumulation, Welfare, and the Emergence of Pension-Fund Activism," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(1), pages 54-82, March.
    14. Nicola Cetorelli, 2001. "Competition among banks: good or bad?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 38-48.
    15. Agostino, Mariarosaria & Gagliardi, Francesca & Trivieri, Francesco, 2010. "Credit market structure and bank screening: An indirect test on Italian data," Review of Financial Economics, Elsevier, vol. 19(4), pages 151-160, October.
    16. Nikolaos Papanikolaou, 2010. "Market Strucutre, Screening Activity and Bank Lending Behavior," LSF Research Working Paper Series 10-11, Luxembourg School of Finance, University of Luxembourg.
    17. Angela S. Bergantino & Claudia Capozza, 2012. "The e§ect of Bank Concentration on Entrepreneurship in Central and Eastern European Transition Countries," SERIES 0043, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Nov 2012.
    18. Mariarosaria Agostino & Francesco Trivieri, 2008. "Banking Competition and SMEs Bank Financing. Evidence from the Italian Provinces," Journal of Industry, Competition and Trade, Springer, vol. 8(1), pages 33-53, March.
    19. Claudia Capozza & Angela Stefania Bergantino, 2013. "The effect of Bank Concentration on Entrepreneurship in Central and Eastern European Transition Countries_x0003_," ERSA conference papers ersa13p1049, European Regional Science Association.

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