DP2045 Bank Competition and Enterprise restructuring in Transition Economies

Author(s): Monika Schnitzer
Publication Date: December 1998
Keyword(s): Bank Competition, market entry, Restructuring, screening, Transition Economies
JEL(s): D43, G21, G34, L13, P31, P34
Programme Areas: Industrial Organization, Transition Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=2045

We investigate how bank competition affects the efficiency of credit allocation, using a model of spatial competition. Our analysis shows that bad loans are more likely the larger the number of banks competing for customers. We study further how many banks will be active if market entry is not regulated. Free entry can induce too much entry and thus too many bad loans compared to the social optimum. Finally, we analyse how bank competition affects the firms' restructuring effort. We find that restructuring has positive externalities that give rise to multiple equilibria, with either much or little restructuring activity.