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Credit, Bankruptcy, and Intermediary Market Structure

Subject

Finance

Publishing details

Authors / Editors

Buraschi A;Hao L

Publication Year

2001

Abstract

We use a model of costly monitoring to study the determinants of savings mobilization, capital allocation and entrepreneur bankruptcy rates under different market structures of financial intermediation. Borrower-entrepreneurs have access to the same investment project but differ in the value of their collateralizable assets. The main finding is that monopolistic intermediation mobilizes less savings and induces higher entrepreneur bankruptcy rates than competitive intermediation. These two types of monopoly distortions are due to the monopoly power with lenders and with borrowers respectively. Under both market structures, an increase in available credit or a reduction in monitoring costs imply that more collateral-constrained entrepreneurs obtain funds, but bankruptcy rates are reduced only under competitive intermediation. Implications to financial market liberalization are derived.

Publication Research Centre

Institute of Finance and Accounting

Series Number

FIN 354

Series

IFA Working Paper

Available on ECCH

No


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