Credit, Bankruptcy, and Intermediary Market Structure

Finance

IFA Working Paper

2001

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.

Institute of Finance and Accounting

FIN 354

IFA Working Paper

No