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Information, Nonexcludability, and Financial Market Structure

  • Bharat N. Anand
  • Alexander Galetovic

    ()

We study the determinants of market structure in financial intermediation markets. We establish that the input of intermediation services-information-is always non-excludable (though not necessarily non-rival), and intermediaries cannot establish property rights over it. We show that non-excludability is the main determinant of market structure, and present a theory in which market structure, margins, and employees' wages are endogenously determined. The models we study generate the following results: (1) Intermediaries' margins are lower in more concentrated markets. (2) There cannot exist a single dominant intermediary in equilibrium; rather, intermediaries must be few and of similar sizes. (3) Even in the absence of entry costs required to become established in the market, intermediaries may still make profits in equilibrium. (4) Increases in the size of the market may have no effect on market concentration. (5) Lower entry costs may result in more concentrated markets. (6) In intermediation markets, employees earn a wage premium unrelated to moral hazard. (7) Wages are higher in more concentrated intermediation markets, ceteris paribus. We examine in detail two markets-investment banking and venture capital- and show that the theory is consistent with the evidence.

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 7.

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Date of creation: 1996
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Handle: RePEc:edj:ceauch:7
Contact details of provider: Web page: http://www.dii.uchile.cl/cea/

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  1. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
  2. Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
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  8. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
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  13. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
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  15. Foster, F Douglas, 1989. " Syndicate Size, Spreads, and Market Power during the Introduction of Shelf Registration," Journal of Finance, American Finance Association, vol. 44(1), pages 195-204, March.
  16. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
  17. Bharat N. Anand & Alexander Galetovic, 2000. "Weak Property Rights and Holdup in R&D," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 615-642, December.
  18. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  19. Gompers, Paul A, 1995. " Optimal Investment, Monitoring, and the Staging of Venture Capital," Journal of Finance, American Finance Association, vol. 50(5), pages 1461-89, December.
  20. Thakor, Anjan V, 1996. " Capital Requirements, Monetary Policy, and Aggregate Bank Lending: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 51(1), pages 279-324, March.
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