Working Paper

The role of credit market competition on lending strategies and on capital accumulation

Abstract: This paper examines the role of credit market competition in the dynamic of capital accumulation. It is shown that the lending relationship problem which seems to characterize competitive credit markets can have negative repercussions for capital accumulation. In contrast, monopoly power in banking can be beneficial for growth. A monopolist bank may lower the equilibrium quantity of credit, but it allows a better allocation of credit supply. This result reconciles with the available empirical evidence and suggests a positive role for monopoly power in banking, especially for developing countries.

Keywords: Credit; Capital;

Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series, Issues in Financial Regulation

Publication Date: 1997

Number: WP-97-14