On the Role of Bank Competition for Corporate Finance and Corporate Control in Transition Economies
CEPR Discussion Paper Series Number 2013
Posted: 12 Dec 1998
Date Written: November 1998
Banks play a central role in financing and monitoring firms in transition economies. This study examines how bank competition affects the efficiency of credit allocation; monitoring of firms; and the firms' restructuring effort. In our model, banks compete to finance an investment project with uncertain return. By screening the firm a bank learns about its profitability. Surprisingly, it is found that an increase in bank competition need not reduce a bank's screening incentive even though it lowers its expected profits. Furthermore, competition has a positive impact on the firms restructuring efforts. This suggests a positive role for bank competition in transition economies.
JEL Classification: D43. G21. G34. L13. P31
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