Can Competition in the Credit Market be Excessive?

Ramon Caminal and Carmen Matutes

No 1725, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the welfare implications of market power in a model where banks choose between credit rationing and monitoring in order to alleviate an underlying moral-hazard problem. We show that the effect of banks’ market power on social welfare is the result of two countervailing effects. On the one hand, higher market power increases lending rates, worsens the borrower’s incentive problem and investment is further reduced below the efficient level. On the other hand, higher market power induces banks to exert higher monitoring effort and reduces the frequency of credit rationing. Whenever the second effect dominates, it is socially optimal to provide banks with some degree of market power.

Keywords: Credit Rationing; market power; Monitoring; Moral Hazard (search for similar items in EconPapers)
JEL-codes: D82 G21 L10 (search for similar items in EconPapers)
Date: 1997-10
References: Add references at CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1725 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Can competition in the credit market be excessive? (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:1725

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... ers/dp.php?dpno=1725

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().