Softening competition by inducing switching in credit markets

We show that competing banks relax overall competition by inducing borrowers to switch lenders. We illustrate our findings in a two-period model with adverse selection where banks strategically commit to disclosing borrower information. By doing this, they invite rivals to poach their first-period m...

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Bibliographic Details
Published in:The Journal of industrial economics 2004-03, Vol.LII (1), p.27-52
Main Authors: Bouckaert, Jan, Degryse, Hans
Format: Article
Language:English
Subjects:
Bank operations
Banks
Competition
Credit
Economic models
Economics
Industrial economics
Loans
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Summary:We show that competing banks relax overall competition by inducing borrowers to switch lenders. We illustrate our findings in a two-period model with adverse selection where banks strategically commit to disclosing borrower information. By doing this, they invite rivals to poach their first-period market. Disclosure of borrower information increases the rival's second-period profits. This dampens competition for serving the first-period market. Reprinted by permission of Blackwell Publishers
ISSN:0022-1821