What determines banks’ market power? Akerlof versus Herfindahl

Moshe Kim, Eirik Kristiansen and Bent Vale

No 2005/8, Working Paper from 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.

Keywords: Banking; risk-pricing; lock-in (search for similar items in EconPapers)
JEL-codes: G21 L15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2005-09-12
New Economics Papers: this item is included in nep-com, nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2005_08

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