Product Market Competition and Collateralized Debt
30 Pages Posted: 2 Jul 2012 Last revised: 8 Jun 2013
Date Written: February 15, 2013
This paper presents a model where bank credit depends upon borrowers' product market structure. We show that a larger number of competitors in the industry may increase credit availability by enhancing the resale value of the collateralized productive assets. We also study how this benefit of competition is affected by the existence of outsiders willing to bid for the collateralized productive assets of the insiders. Our model encompasses the standard case of Cournot competition either when the default probability goes to zero or when there are multiple outsiders bidding for the productive assets. We test the empirical implications of the theoretical analysis exploiting information on the access to finance of small and medium Italian firms and find supportive evidence.
Keywords: Collateralized loans, product market competition, productive assets resale value
JEL Classification: D22, L13, G33
Suggested Citation: Suggested Citation