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Credit Quantity and Credit Quality: Bank Competition and Capital Accumulation

  • Nicola Cetorelli
  • Pietro Peretto

In this paper we show that bank competition has an intrinsically ambiguous impact on capital accumulation. We further show that it is also responsible for the emergence of development traps in economies that otherwise would be characterized by unique equilibria. These results explain the con‡icting evidence emerging from the recent empirical studies of the e¤ects of bank competition on economic growth. We obtain them developing a dynamic, general equilibrium model of capital accumulation where banks operate in a Cournot oligopoly. More banks lead to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to o¤er relationship services which contribute to improve the likelihood of success of entrepreneurs’projects. This tension between credit quantity and credit quality is what leads to the ambiguous e¤ect on capital accumulation, We also show that conditioning on one key parameter resolves the theoretical ambiguity: in economies where intrinsic market uncertainty is high (low), less (more) competition leads to higher capital accumulation.

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Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-65.

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Length: 42
Date of creation: 2010
Date of revision:
Handle: RePEc:duk:dukeec:10-65
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