Working Paper: CEPR ID: DP2013
Authors: Monika Schnitzer
Abstract: Banks play a central role in financing and monitoring firms in transition economies. This study examines how bank competition affects the efficiency of credit allocation; monitoring of firms; and the firms' restructuring effort. In our model, banks compete to finance an investment project with uncertain return. By screening the firm a bank learns about its profitability. Surprisingly, it is found that an increase in bank competition need not reduce a bank's screening incentive even though it lowers its expected profits. Furthermore, competition has a positive impact on the firms restructuring efforts. This suggests a positive role for bank competition in transition economies.
Keywords: transition economies; bank competition; corporate governance; corporate finance; screening; restructuring
JEL Codes: D43; G21; G34; L13; P31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased bank competition (G21) | Improved monitoring incentives for banks (G21) |
| Increased bank competition (G21) | Enhanced restructuring efforts by firms (G32) |
| Increased bank competition (G21) | More efficient credit allocation (E51) |
| Increased bank competition (G21) | Increased incentives for firms to restructure (H32) |
| Competition (L13) | Banks' incentives to screen investment projects (G21) |
| Monopolistic banking structure (G21) | No incentive for firms to restructure (G32) |