Credit quantity and credit quality: Bank competition and capital accumulation

Journal Article (Journal Article)

In this paper we show that bank competition has an intrinsically ambiguous impact on capital accumulation. We further show that it is also responsible for the emergence of development traps in economies that otherwise would be characterized by unique equilibria. These results explain the conflicting evidence emerging from the recent empirical studies of the effects of bank competition on economic growth. We obtain them developing a dynamic, general equilibrium model of capital accumulation where banks operate in a Cournot oligopoly. More banks lead to a higher quantity of credit available to entrepreneurs, but also to diminished incentives to offer relationship services that improve the likelihood of success of investment projects. We also show that conditioning on one key parameter resolves the theoretical ambiguity: in economies where intrinsic market uncertainty is high (low), less (more) competition leads to higher capital accumulation. © 2012 Elsevier Inc.

Full Text

Duke Authors

Cited Authors

  • Cetorelli, N; Peretto, PF

Published Date

  • May 1, 2012

Published In

Volume / Issue

  • 147 / 3

Start / End Page

  • 967 - 998

Electronic International Standard Serial Number (EISSN)

  • 1095-7235

International Standard Serial Number (ISSN)

  • 0022-0531

Digital Object Identifier (DOI)

  • 10.1016/j.jet.2012.01.006

Citation Source

  • Scopus