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(a)ihs.ac.at
Tel: +43-1-59991 141
Fax: +43-1-597 0635
Homepage:
http://w3.ihs.ac.at/~lee/
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