Softening Competition by Inducing Switching in Credit Markets

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.

20. March 2004

Authors Jan Bouckaert Hans Degryse

Suggested Reading

Softening Competition by Inducing Switching in Credit Markets: A Correction

Jan Bouckaert Hans Degryse Jorge Fernández-Ruiz Miguel García-Cestona

in: Journal of Industrial Economics, No. 3, 2008

Abstract

In a recent article in this journal, Bouckaert and Degryse [2004] (denoted B&D) present a model in which banks strategically commit to disclosing borrower information. In this note, we point out an error in B&D and show that, although banks' information disclosure may indeed arise in equilibrium, it only does so if adverse selection is not too harsh.

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Professor Hans Degryse, PhD
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