Information, Non-Excludability, and Financial Market Structure

Yale SOM Working Paper #2

43 Pages Posted: 28 Oct 1997

See all articles by Bharat N. Anand

Bharat N. Anand

Harvard University - Strategy Unit

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Date Written: July 1997


We study the determinants of market structure in financial intermediation markets when property rights over information are weak. We show that incentives to gather information to screen firms can be preserved in decentralized markets with more than one intermediary. In equilibrium, each intermediary possesses local monopoly power, which is preserved by implicit contracts between intermediaries. These, in turn, impose constraints on aggregate market structure. We examine the robustness of such self-enforcing behavior to entry and present a theory in which market structure is endogenously determined.

We obtain the following results: 1) There cannot exist a single dominant intermediary in equilibrium; rather, they must be few and of similar sizes. 2) Even with no entry costs, intermediaries may still make profits in equilibrium. 3) Increases in market size may have no effect on concentration. 4) Changes in entry costs do not affect prices and may not affect concentration.

We apply our theory to two markets -- investment banking and venture capital -- and use it to organize and interpret the evidence.

JEL Classification: G20, L22

Suggested Citation

Anand, Bharat N. and Galetovic, Alexander, Information, Non-Excludability, and Financial Market Structure (July 1997). Yale SOM Working Paper #2. Available at SSRN: or

Bharat N. Anand (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-5082 (Phone)
617 495-0355 (Fax)

Alexander Galetovic

Universidad Adolfo Ibáñez ( email )


Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )


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