Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 9/2000:
Monitoring and Market Power in Loan Markets

Ari Hyytinen () and Otto Toivanen

Abstract: Whether or not banks are engaged in ex ante monitoring of customers may have important consequences for the whole economy. We approach this question via a model in which banks can invest in either information acquisition or market power (product differentiation). The two alternatives generate different predictions, which are tested using panel data on Finnish local banks. We find evidence that banks’ investments in branch networks and human capital (personnel) contribute to information acquisition but not to market power. We also find that managing customers’ money transactions enhances banks ability to control their lending risks.

Keywords: banks; information acquisition; market power; fixed costs; branch network; default costs; (follow links to similar papers)

JEL-Codes: D21; G21; L15; (follow links to similar papers)

49 pages, August 31, 2000

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