Asymmetric Information and the Market Structure of the Banking Industry

June 1, 1998

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Format: Chicago

Giovanni Dell'Ariccia. Asymmetric Information and the Market Structure of the Banking Industry, (USA: International Monetary Fund, 1998) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

The paper analyzes the effects of informational asymmetries on the market structure of the banking industry in a multi-period model of spatial competition. All lenders face uncertainty with regard to borrowers’ creditworthiness, but, in the process of lending, incumbent banks gather proprietary information about their clients, acquiring an advantage over potential entrants. These informational asymmetries are an important determinant of the industry structure and may represent a barrier to entry for new banks. The paper shows that, in contrast with traditional models of horizontal differentiation, the steady-state equilibrium is characterized by a finite number of banks even in the absence of fixed costs.

Subject: Banking, Competition, Credit, Discount rates, Financial institutions, Financial markets, Financial services, Labor, Loans, Money, Self-employment

Keywords: Adverse selection, Bank-client relationship, Barriers to Entry, Borrower population, Competition, Competitor bank, Credit, Discount rates, Europe, Incumbent bank, Interest rate, Loan Market, Loans, Market power, Market share, Relocation behavior, Self-employment, Spatial Competition, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1998/092
Stock No:

WPIEA0921998
ISBN:

9781451951547
ISSN:

1018-5941

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