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Credit market structure and product market competition

Author

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  • Lars Jebjerg

    (Institute of Economics, University of Copenhagen)

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.

Suggested Citation

  • Lars Jebjerg, 1999. "Credit market structure and product market competition," Discussion Papers 99-14, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:9914
    as

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    More about this item

    Keywords

    financial markets; regulation; banks;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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