Credit market structure and product market competition

Lars Jebjerg ()

No 99-14, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: This paper relates credit market structure to efficiency in product markets. It is shown that debt financing with limited liability mute the borrower's incentives. The main theorem compares "industry banking" to independent financing of firms. When firms' effort levels are strategic substitutes and costs are convex, independent financing Pareto-dominates industry financing. The contract offered by an industry bank both compensates for the externality between firms and incorporates an element of rent-extraction. The cumulative effect yields a suboptimal level of effort. When firms are sufficiently strong at bargaining, banks will be held down to their break-even payoff, and the outcome on the product market only depends on the riskless rate of interest.

Keywords: financial markets; regulation; banks (search for similar items in EconPapers)
JEL-codes: G21 G28 L51 (search for similar items in EconPapers)
Pages: 30 pages
Date: 1999-04
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
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:kud:kuiedp:9914

Access Statistics for this paper

More papers in Discussion Papers from University of Copenhagen. Department of Economics Oester Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Hoffmann ().