The Effect of Credit Market Competition on Lending Relationships

53 Pages Posted: 23 Aug 2000  

Mitchell A. Petersen

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Date Written: November 1994

Abstract

This paper provides a simple model showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The model has implications about the availability and the price of credit as firms age in different markets. The paper offers evidence for these implications from small business data. It concludes with conjectures on the costs and benefits of liberalizing financial markets, as well as the timing of such reforms.

Suggested Citation

Petersen, Mitchell A. and Rajan, Raghuram G., The Effect of Credit Market Competition on Lending Relationships (November 1994). NBER Working Paper No. w4921. Available at SSRN: https://ssrn.com/abstract=238132

Mitchell A. Petersen (Contact Author)

Northwestern University - Kellogg School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Raghuram G. Rajan

University of Chicago - Booth School of Business ( email )

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International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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773-702-0458 (Fax)

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