Monitoring and Market Power in Loan Markets
Bank of Finland Discussion Paper No. 9/2000
49 Pages Posted: 9 Jun 2002
Date Written: August 31, 2000
Abstract
Whether or not banks are engaged in ex ante monitoring of customers may have important consequences for the whole economy. We approach this question via a model in which banks can invest in either information acquisition or market power (product differentiation). The two alternatives generate different predictions, which are tested using panel data on Finnish local banks. We find evidence that banks' investments in branch networks and human capital (personnel) contribute to information acquisition but not to market power. We also find that managing customers' money transactions enhances banks ability to control their lending risks.
Keywords: banks, information acquisition, market power, fixed costs, branch network, default costs
JEL Classification: D21, G21, L15
Suggested Citation: Suggested Citation
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