Credit, Bankruptcy, and Intermediary Market Structure

Buraschi, A and Hao, L (2001) Credit, Bankruptcy, and Intermediary Market Structure. Working Paper. London Business School IFA Working Paper.

Abstract

We use a model of costly monitoring to study the determits of savings mobilization, capital allocation and entrepreneur bankruptcy rates under different market structures of ficial intermediation. Borrowerentrepreneurs have access to the same investment project but differ in the value of their collateralizable assets. The main finding is that monopolistic intermediation mobilizes less savings and induces higher entrepreneur bankruptcy rates than competitive intermediation. These two types of monopoly distortions are due to the monopoly power with lenders and with borrowers respectively. Under both market structures, an increase in available credit or a reduction in monitoring costs imply that more collateralconstrained entrepreneurs obtain funds, but bankruptcy rates are reduced only under competitive intermediation. Implications to ficial market liberalization are derived.