Working Paper: NBER ID: w9659
Authors: Raymond Fisman; Mayank Raturi
Abstract: Previous work has claimed that monopoly power facilitates the provision of credit, since monopolists are better able to enforce payment. Here, we argue that if relationship-specific investments are required by borrowers to establish creditworthiness, monopoly power may reduce credit provision because hold up problems ex post will deter borrowers from investing in establishing creditworthiness. Empirically, we examine the relationship between monopoly power and credit provision, using data on the supply relationships of firms in five African countries. Consistent with the upfront investment story, we find that monopoly power is negatively associated with credit provision, and that this correlation is stronger in older supplier relationships. Because the data include several observations per firm, we are able to utilize firm fixed-effects, thus netting out unobserved firm characteristics that may have been driving results in earlier studies.
Keywords: No keywords provided
JEL Codes: L12; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monopoly power (D42) | reduced credit provision (G21) |
| hold-up problem (D86) | reduced credit provision (G21) |
| competition (L13) | increased credit provision (E51) |
| length of relationship (C41) | stronger negative effect of monopoly power on credit provision (D42) |
| relationship-specific investments (D14) | increased credit provision (E51) |
| trust built over time (Z13) | increased likelihood of obtaining credit (G21) |