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Softening Competition by Inducing Switching in Credit Markets
Author(s) -
Bouckaert Jan,
Degryse Hans
Publication year - 2004
Publication title -
the journal of industrial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.93
H-Index - 77
eISSN - 1467-6451
pISSN - 0022-1821
DOI - 10.1111/j.0022-1821.2004.00215.x
Subject(s) - commit , adverse selection , competition (biology) , monetary economics , period (music) , business , economics , microeconomics , ecology , physics , database , computer science , acoustics , biology
We show that competing banks relax overall competition by inducing borrowers to switch lenders. We illustrate our findings in a two‐period model with adverse selection where banks strategically commit to disclosing borrower information. By doing this, they invite rivals to poach their first‐period market. Disclosure of borrower information increases the rival's second‐period profits. This dampens competition for serving the first‐period market.