Asymmetric Information and the Market Structure of the Banking Industry

Author/Editor:

Giovanni Dell'Ariccia

Publication Date:

June 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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. 98/92

English

Publication Date:

June 1, 1998

ISBN/ISSN:

9781451951547/1018-5941

Stock No:

WPIEA0921998

Format:

Paper

Pages:

31

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