We study a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents. We show that more bank competition results in lower economy-wide risk, lower bank capital ratios, more efficient production plans and Pareto-ranked real allocations. Perfect competition supports a second best allocation and optimal levels of bank risk and capitalization. These results are at variance with those obtained by a large literature that has studied a similar environment in partial equilibrium, they are empirically relevant, and carry significant implications for financial policy.
Joint paper with Gianni De Nicolo' - IMF, Washington DC - USA
| Title | Format (Language, Size, Publication date) |
|---|---|
| paper |
 pdf (it, 347 KB, 18/05/09)
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| slides |
pdf (it, 317 KB, 18/05/09)
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