Asymmetric Information and the Structure of the Banking Industry

Posted: 21 Mar 2001

See all articles by Giovanni Dell'Ariccia

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Abstract

We analyze the effects of informational asymmetries on the market structure of the banking industry in a multi-period model of spatial competition. In the process of lending, incumbent banks gather proprietary information about their clients, acquiring an advantage over potential entrants. We show that these informational asymmetries are important determinants of the industry structure and of banks' strategic behavior. Contrary to traditional models of horizontal differentiation, the steady-state equilibrium is characterized by a finite number of banks even in the absence of exogenous fixed costs. In addition, less concentrated industry structures may be associated with higher interest rates.

Keywords: Bank competition, asymmetric information, spatial differentiation, barriers to entry

JEL Classification: D43, D82, G21

Suggested Citation

Dell'Ariccia, Giovanni, Asymmetric Information and the Structure of the Banking Industry. Available at SSRN: https://ssrn.com/abstract=258814

Giovanni Dell'Ariccia (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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