Oligopoly Banking and Capital Accumulation

41 Pages Posted: 15 Jan 2001

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

Date Written: December 2000

Abstract

We develop a dynamic general equilibrium model of capital accumulation where credit is intermediated by banks operating in a Cournot oligopoly. The number of banks affects capital accumulation through two channels. First, it affects the quantity of credit available to entrepreneurs. Second, it affects banks' decisions to collect costly information about entrepreneurs, and thus determines the efficiency of the credit market. We show that under plausible conditions, the market structure that maximizes the economy's steady-state income per capita is neither a monopoly nor competition, but an intermediate oligopoly. Moreover, the credit market splits in two segments: one in which loans are screened and only high quality entrepreneurs obtain credit, and one in which banks extend credit indiscriminately to all entrepreneurs. The relative size of the two segments depends on the market power of banks and evolves endogenously along the path of capital accumulation. We thus obtain the prediction that the banking sector becomes more sophisticated as the economy develops.

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

Suggested Citation

Cetorelli, Nicola and Peretto, Pietro F., Oligopoly Banking and Capital Accumulation (December 2000). FRB of Chicago Working Paper No. 2000-12, Duke Department of Economics Research Paper No. 19, Available at SSRN: https://ssrn.com/abstract=254343 or http://dx.doi.org/10.2139/ssrn.254343

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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