Oligopoly banking and capital accumulation
Nicola Cetorelli and
Pietro Peretto
No WP-00-12, Working Paper Series from Federal Reserve Bank of Chicago
Abstract:
We develop a dynamic general equilibrium model of capital accumulation where credit is intermediated by banks operating in a Cournot oligopoly. The number of banks affects capital accumulation through two channels. First, it affects the quantity of credit available to entrepreneurs. Second, it affects banks' decisions to collect costly information about entrepreneurs, and thus determines the efficiency of the credit market. We show that under plausible conditions, the market structure that maximizes the economy's steady-state income per capita is neither a monopoly nor competition, but an intermediate oligopoly. Moreover, the credit market splits in two segments: one in which loans are screened and only high quality entrepreneurs obtain credit, and one in which banks extend credit indiscriminately to all entrepreneurs. The relative size of the two segments depends on the market power of banks and evolves endogenously along the path of capital accumulation. We thus obtain the prediction that the banking sector becomes more sophisticated as the economy develops.
Keywords: Oligopolies; Bank capital; Banking structure (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (31)
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Working Paper: Oligopoly Banking and Capital Accumulation (2000) 
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