NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Effect of Credit Market Competition on Lending Relationships

Mitchell A. Petersen, Raghuram G. Rajan

NBER Working Paper No. 4921
Issued in November 1994
NBER Program(s):   CF

This paper provides a simple model showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The model has implications about the availability and the price of credit as firms age in different markets. The paper offers evidence for these implications from small business data. It concludes with conjectures on the costs and benefits of liberalizing financial markets, as well as the timing of such reforms.

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Published: Quarterly Journal of Economics, May 1995, pp. 407-443.

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