Credit Quantity and Credit Quality: Bank Competition and Capital Accumulation

43 Pages Posted: 18 Sep 2010

See all articles by Nicola Cetorelli

Nicola Cetorelli

Federal Reserve Bank of New York

Pietro F. Peretto

Duke University - Department of Economics; Duke Innovation & Entrepreneurship Initiative

Multiple version iconThere are 2 versions of this paper

Date Written: March 2010

Abstract

In this paper we show that bank competition has an intrinsically ambiguous impact on capital accumulation. We further show that it is also responsible for the emergence of development traps in economies that otherwise would be characterized by unique equilibria. These results explain the convicting evidence emerging from the recent empirical studies of the effects of bank competition on economic growth. We obtain them developing a dynamic, general equilibrium model of capital accumulation where banks operate in a Cournot oligopoly. More banks lead to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to other relationship services which contribute to improve the likelihood of success of entrepreneurs' projects.

This tension between credit quantity and credit quality is what leads to the ambiguous effect on capital accumulation, We also show that conditioning on one key parameter resolves the theoretical ambiguity: in economies where intrinsic market uncertainty is high (low), less (more) competition leads to higher capital accumulation.

JEL Classification: G1, G2, L1, L2, O1, O4

Suggested Citation

Cetorelli, Nicola and Peretto, Pietro F., Credit Quantity and Credit Quality: Bank Competition and Capital Accumulation (March 2010). Economic Research Initiatives at Duke Working Paper No. 63, Available at SSRN: https://ssrn.com/abstract=1677607 or http://dx.doi.org/10.2139/ssrn.1677607

Nicola Cetorelli (Contact Author)

Federal Reserve Bank of New York ( email )

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Pietro F. Peretto

Duke University - Department of Economics ( email )

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Duke Innovation & Entrepreneurship Initiative ( email )

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