Asymmetric Information and the Market Structure of the Banking Industry
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Summary:
The paper analyzes the effects of informational asymmetries on the market structure of the banking industry in a multi-period model of spatial competition. All lenders face uncertainty with regard to borrowers’ creditworthiness, but, in the process of lending, incumbent banks gather proprietary information about their clients, acquiring an advantage over potential entrants. These informational asymmetries are an important determinant of the industry structure and may represent a barrier to entry for new banks. The paper shows that, in contrast with traditional models of horizontal differentiation, the steady-state equilibrium is characterized by a finite number of banks even in the absence of fixed costs.
Series:
Working Paper No. 1998/092
Subject:
Banking Competition Credit Discount rates Financial institutions Financial markets Financial services Labor Loans Money Self-employment
English
Publication Date:
June 1, 1998
ISBN/ISSN:
9781451951547/1018-5941
Stock No:
WPIEA0921998
Pages:
31
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