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Do rivals enhance your credit conditions?

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  • Cerasi, Vittoria
  • Fedele, Alessandro
  • Miniaci, Raffaele

Abstract

In a model where firms rely on bank financing to build capacity, put up specialized productive assets as collateral, and then compete à la Cournot, we introduce a probability of default. We investigate how the number of competitors affects the equilibrium amount of bank credit and derive conditions under which an inverted U-shaped relationship occurs. On the one hand, more competitors enhance the resale value of collateralized productive assets. On the other hand, more competitors shrink firms’ profits and the resulting income that can be pledged to banks. We then extend the analysis to firms outside the Cournot industry that are willing to buy productive assets in liquidation and show that the equilibrium bank credit becomes monotonically decreasing in the number of competitors.

Suggested Citation

  • Cerasi, Vittoria & Fedele, Alessandro & Miniaci, Raffaele, 2019. "Do rivals enhance your credit conditions?," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 228-243.
    • Handle: RePEc:eee:jeborg:v:157:y:2019:i:c:p:228-243
    DOI: 10.1016/j.jebo.2017.07.038
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    Cited by:

    1. Simone Boccaletti & Vittoria Cerasi, 2021. "Liquidation value of productive assets and product differentiation," Working Papers 483, University of Milano-Bicocca, Department of Economics, revised Oct 2021.
    2. Katarzyna Platt, 2020. "Corporate Bonds And Product Market Competition," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 615-647, August.

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    More about this item

    Keywords

    Number of competitors; Collateralized bank financing; Resale of productive assets; Outside firms;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory

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