What Determines Banks' Market Power? Akerlof or Herfindahl

32 Pages Posted: 17 Jun 2006

See all articles by Moshe Kim

Moshe Kim

University of Haifa - Department of Economics

Eirik Gaard Kristiansen

NHH Norwegian School of Economics; Norwegian School of Economics (NHH) - Department of Economics

Bent Vale

Norges Bank (Central bank of Norway)

Date Written: October 3, 2006

Abstract

We introduce a theoretical model predicting that banks' interest rate markups follow a lifecycle pattern. Due to endogenous bank monitoring by competing banks, borrowing firms initially face a low markup, thereafter an increasing markup until it falls for old firms. By applying a large sample of small firms and a new measure of asymmetric information, we find that firms with significant asymmetric information problems have a more pronounced life-cycle pattern of interest rate markups. We also examine effects of concentrated banking markets on interest markups. Results indicate that markups are mainly driven by asymmetric information problems (Akerlof). However,we find weak evidence that bank market concentration is important for old firms (Herfindahl).

Keywords: Banking, loan-pricing, lock-in, asymmetric information, competition

JEL Classification: G21, L15

Suggested Citation

Kim, Moshe and Kristiansen, Eirik Gaard and Vale, Bent, What Determines Banks' Market Power? Akerlof or Herfindahl (October 3, 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=909178 or http://dx.doi.org/10.2139/ssrn.909178

Moshe Kim

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel
(972) 4 8240115 (Phone)
(972)4-8240059 (Fax)

Eirik Gaard Kristiansen

NHH Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 95 92 78 (Phone)
+47 55 95 95 43 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

Bent Vale (Contact Author)

Norges Bank (Central bank of Norway) ( email )

Bankplassen 2
P.O. Box 1179
Oslo, N-0107
Norway
+47 22 31 66 74 (Phone)
+47 22 42 40 62 (Fax)

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