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Credit quantity and credit quality: Bank competition and capital accumulation

Publication ,  Journal Article
Cetorelli, N; Peretto, PF
Published in: Journal of Economic Theory
May 1, 2012

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.

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Published In

Journal of Economic Theory

DOI

EISSN

1095-7235

ISSN

0022-0531

Publication Date

May 1, 2012

Volume

147

Issue

3

Start / End Page

967 / 998

Related Subject Headings

  • Economic Theory
  • 1499 Other Economics
  • 1401 Economic Theory
 

Citation

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Cetorelli, N., & Peretto, P. F. (2012). Credit quantity and credit quality: Bank competition and capital accumulation. Journal of Economic Theory, 147(3), 967–998. https://doi.org/10.1016/j.jet.2012.01.006
Cetorelli, N., and P. F. Peretto. “Credit quantity and credit quality: Bank competition and capital accumulation.” Journal of Economic Theory 147, no. 3 (May 1, 2012): 967–98. https://doi.org/10.1016/j.jet.2012.01.006.
Cetorelli N, Peretto PF. Credit quantity and credit quality: Bank competition and capital accumulation. Journal of Economic Theory. 2012 May 1;147(3):967–98.
Cetorelli, N., and P. F. Peretto. “Credit quantity and credit quality: Bank competition and capital accumulation.” Journal of Economic Theory, vol. 147, no. 3, May 2012, pp. 967–98. Scopus, doi:10.1016/j.jet.2012.01.006.
Cetorelli N, Peretto PF. Credit quantity and credit quality: Bank competition and capital accumulation. Journal of Economic Theory. 2012 May 1;147(3):967–998.
Journal cover image

Published In

Journal of Economic Theory

DOI

EISSN

1095-7235

ISSN

0022-0531

Publication Date

May 1, 2012

Volume

147

Issue

3

Start / End Page

967 / 998

Related Subject Headings

  • Economic Theory
  • 1499 Other Economics
  • 1401 Economic Theory