Working Paper: NBER ID: w4921
Authors: Mitchell A. Petersen; Raghuram G. Rajan
Abstract: This paper provides a simple model showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The model has implications about the availability and the price of credit as firms age in different markets. The paper offers evidence for these implications from small business data. It concludes with conjectures on the costs and benefits of liberalizing financial markets, as well as the timing of such reforms.
Keywords: credit market competition; lending relationships; small business finance
JEL Codes: G21; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit market competition (E44) | formation and value of lending relationships (G21) |
| credit market competition (E44) | high interest rates on young or distressed firms (G33) |
| high interest rates on young or distressed firms (G33) | credit rationing (G21) |
| concentrated credit markets (G21) | better lending relationships (G21) |
| concentrated credit markets (G21) | lower interest rates (E43) |
| better lending relationships (G21) | financing for young firms (M13) |
| degree of competition in credit markets (G21) | availability and pricing of credit as firms age (D25) |