The structure of the banking sector, credit screening and firm risk

Michael Tröge

No FS IV 99-23, Discussion Papers, Research Unit: Market Dynamics from WZB Berlin Social Science Center

Abstract: With an auction model of bank competition, the relationship between the number of banks in a market, the quality of the firms and the banks’ effort to carry out creditworthiness tests is analyzed. It is shown that, if the cost of information acquisition is taken into account, welfare and the firm’s profit may decrease with a higher number of banks. In general a high number of banks produces more welfare with a bad sample of firms, whereas a low number of banks is preferable for a sample with a lot of good firms.

Date: 1999
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