On May 17th, 4 p.m. at the Institute for Advanced Studies, HS II Stumpergasse 56, 1060, Vienna

Prof. Hao Li (Univ. of Hong Kong) will present "Credit, Bankruptcy, and Intermediary Market Structure" (with Andrea Buraschi, LBS)

The paper can be downloaded from his website at http://arch.econ.hku.hk/~haoli/research/index.htm

Abstract: We use a model of costly monitoring to study the determinants of savings mobilization and capital allocation under different market structures of financial intermediation. Borrower- entrepreneurs have access to the same projects of positive net value but differ in the value of collateralizable assets. We consider both when the value of collateralizable assets is public information, and it is known only to entrepreneurs. The amount of lending is the same under the two information structures, but under monopolistic intermediation default occurs with smaller probabilities with private collateral information. Whether collateral information is public or private, monopolistic intermediation results in less lending and higher bankruptcy rates than competitive intermediation, although credit rationing is more likely to occur under competitive intermediation. We show that making intermediary market more competitive can be crucial in an economy characterized by uneven non-liquid wealth distribution, high monitoring cost, and inelastic credit supply. Reduction in the costs of auditing and bankruptcy reduces bankruptcy rates under competitive intermediation, but has no effect on bankruptcy rates under monopoly. When the monopoly intermediary's market power with lenders and with borrowers cannot be taken away at the same time, it can be more effective to give borrowers rather than lenders access to competitive intermediaries. ______________________________________________________________

Gabriel Lee Institute for Advanced Studies Department of Finance Stumpergasse 56 A-1060 Vienna, AUSTRIA Email: gabriel.lee@ihs.ac.at Tel: +43-1-59991 141 Fax: +43-1-597 0635 Homepage: http://w3.ihs.ac.at/~lee/ =========================================================================