Softening Competition by Inducing Switching in Credit Markets

Jan Bouckaert and Hans Degryse

Journal of Industrial Economics, 2004, vol. 52, issue 1, 27-52

Abstract: We show that competing banks relax overall competition by inducing borrowers to switch lenders. We illustrate our findings in a two‐period model with adverse selection where banks strategically commit to disclosing borrower information. By doing this, they invite rivals to poach their first‐period market. Disclosure of borrower information increases the rival's second‐period profits. This dampens competition for serving the first‐period market.

Date: 2004
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