Strategic Experimentation in Financial Intermediation with Threat of Entry

33 Pages Posted: 24 Apr 2000  

Neelam Jain

City University London

Thomas D. Jeitschko

Michigan State University - Department of Economics

Leonard J. Mirman

University of Virginia - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2000

Abstract

We study how financial intermediation affects real market variables when an incumbent firm is threatened by entry to its market and must contract with a bank for outside funds. Contracts between the bank and the monopolist are short-term and redesigned after the entry decision of a second firm has been made. We show that---as is often the case in short term contracting without commitment---the first period contract contains signal dampening and experimentation effects. More importantly, however, we show that the threat of entry substantially impacts the significance of both effects. Thus, potential entry reduces the impact of signal dampening. And experimentation takes on a strategic aspect, since it must account for the the potential game between incumbent and entrant should entry occur. As a consequence of this, the first period contract is structured to reduce the probability of entry.

JEL Classification: C73, D8, L1

Suggested Citation

Jain, Neelam and Jeitschko, Thomas D. and Mirman, Leonard J., Strategic Experimentation in Financial Intermediation with Threat of Entry (March 2000). Available at SSRN: https://ssrn.com/abstract=215969 or http://dx.doi.org/10.2139/ssrn.215969

Neelam Jain

City University London ( email )

Northampton Square
London, EC1V OHB
United Kingdom

Thomas D. Jeitschko (Contact Author)

Michigan State University - Department of Economics ( email )

110 Marshall-Adams Hall
East Lansing, MI 48824
United States
517-355-8302 (Phone)
517-432-1068 (Fax)

HOME PAGE: http://www.msu.edu/~jeitschk/

Leonard J. Mirman

University of Virginia - Department of Economics ( email )

1818 Winston Rd
Charlottesville, VA
United States

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