What Determines Banks' Market Power? Akerlof versus Herfindahl

Arbeitspapier

We introduce a model analyzing how asymmetric information problems in a bank-loan market may evolve over the age of a borrowing firm. The model predicts a life-cycle pattern for banks' interest rate markup. Young firms pay a low or negative markup, thereafter the markup increases until it falls for old firms. Furthermore, the pattern of the life-cycle depends on the informational advantage of the inside bank and when more dispersed borrower information yields fiercer bank competition. By applying a new measure of the informational advantage of inside banks and a large sample of small Norwegian firms, we find empirical support for the predicted markup pattern. We disentangle effects of asymmetric information (Akerlof effect) from effects of a concentrated banking market (Herfindahl effect). Our results indicate that the interest rate markups are not influenced by bank market concentration.

Object Details

• ISBN: 82-7553-315-5
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2005/8

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Information and Product Quality; Standardization and Compatibility
• Subject: banking ; risk-pricing ; lock-in

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kim, Moshe ; Kristiansen, Eirik Gaard ; Vale, Bent
• Event: Veröffentlichung
• (who): Norges Bank
• (where): Oslo
• (when): 2005

Further information

• Handle: http://hdl.handle.net/10419/209855
• Last update: 10.03.2025, 11:44 AM CET