Publication: Bank lending with imperfect competition and spillover effects
Program
KU-Authors
KU Authors
Co-Authors
Publication Date
Language
Type
Embargo Status
Journal Title
Journal ISSN
Volume Title
Alternative Title
Abstract
We examine bank lending decisions in an economy with spillover effects in the creation of new investment opportunities and asymmetric information in credit markets. We examine price-setting equilibria with horizontally differentiated banks. If bank lending takes place under a weak corporate governance mechanism and is fraught with agency problems and ineffective bank monitoring, then an equilibrium emerges in which loan supply is strategically restricted. In this equilibrium, the loan restriction, the "under- lending" strategy, provides an advantage to one bank by increasing its market share and sustaining monopoly interest rates. The bank's incentives for doing so increase under conditions of increased volatility of lending capacities of banks, more severe borrower-side moral hazard, and lower returns on the investment projects. Although this equilibrium is not always unique, with poor bank monitoring and corporate governance, a more intense banking competition renders the bad equilibrium the unique outcome.
Source
Publisher
Walter de Gruyter
Subject
Economics
Citation
Has Part
Source
Topics in Macroeconomics
Book Series Title
Edition
DOI
10.2202/1534-5998.1452