Monitoring and Market Power in Loan Markets

Bank of Finland Discussion Paper No. 9/2000

49 Pages Posted: 9 Jun 2002

See all articles by Ari Hyytinen

Ari Hyytinen

University of Jyväskylä

Otto Toivanen

Aalto University - Department of Economics; KU Leuven - Faculty of Business and Economics (FBE); CEPR; Helsinki Center of Economic Research (HECER)

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

Hyytinen, Ari and Toivanen, Otto, Monitoring and Market Power in Loan Markets (August 31, 2000). Bank of Finland Discussion Paper No. 9/2000, Available at SSRN: https://ssrn.com/abstract=313359 or http://dx.doi.org/10.2139/ssrn.313359

Ari Hyytinen (Contact Author)

University of Jyväskylä ( email )

PO Box 35
Jyväskylä, 40014
Finland

HOME PAGE: http://www.jyu.fi

Otto Toivanen

Aalto University - Department of Economics ( email )

PO Box 1210
FI-00101 Helsinki
Finland

KU Leuven - Faculty of Business and Economics (FBE) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

CEPR ( email )

London
United Kingdom

Helsinki Center of Economic Research (HECER)

FI-00014 Helsinki
Finland

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