Finance and Competition

30 Pages Posted: 6 Feb 2007

See all articles by Harris Dellas

Harris Dellas

University of Bern - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Ana Fernandes

University of Bern - Department of Economics

Date Written: September 20, 2007

Abstract

Financial constraints are commonly thought as representing a barrier to entry and expansion for new and small firms, thus potentially limiting competition in product markets. We investigate the role of financial constraints for product markets in the context of a general equilibrium, two-sector model, where firms differ in terms of both efficiency and financial constraints. The amelioration of financial constraints can lead to firm entry, smaller average firm size, lower concentration and more competition (lower markups) in financially dependent sectors - the patterns observed in the data - if such constraints afflict disproportionately the smaller firms. This requires a positive correlation between ability and capital ownership. In all other cases, the amelioration of constraints leads to greater concentration and less competition. In the former case incumbents will oppose while in the latter case they will favor financial liberalization.

Keywords: financial development, liberalization, market structure, product market competition

JEL Classification: L1, E2

Suggested Citation

Dellas, Harris and Fernandes, Ana, Finance and Competition (September 20, 2007). Available at SSRN: https://ssrn.com/abstract=961252 or http://dx.doi.org/10.2139/ssrn.961252

Harris Dellas

University of Bern - Department of Economics ( email )

Gesellschaftstrasse 49
Bern, CH-3012
Switzerland
+41 31 631 3989 (Phone)
+41 31 631 3992 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ana Fernandes (Contact Author)

University of Bern - Department of Economics ( email )

Schanzeneckstrasse 1
Bern, CH-3001
Switzerland

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