Credit Market Competition and Capital Regulation



Proof of Proposition 6: We begin with the case of parameter values such that q, k < 1,

and show that there exists a value reD 0 such that kreg <kCS if and only if rD < reD .
Consider the solution that maximizes consumer surplus, k
CS, and assume that R<4c and
c > 16R⅛, which implies that q, kCS 1. From the condition defining kCS,

(R (1 kCS )rD ¢2    , ʌ

∏ = ʌ---⅛--kCS ГЕ = 0,

16c

one can clearly see that, as rD 0, kCS 16R2^ 1 for c > (R2.
By contrast, k
reg is defined by

∂SW
∂k


rD RR +(1 kreg )r
= 4c к 2       )

+ rD rE =0.


For rD 0, kreg 0 as well, since it is optimal to just have deposit-based finance. These
two results together imply that there is some threshold
rD such that, for rD < r D, kreg < kCS.

At the other extreme, we consider the solutions as rD rE. For c > ιr~, kCS =

8c-R+rE-4(4c-R+rE )c

ГЕ


< 1.


By comparison, kreg1 as rDrE for all parameter values.

Therefore, we can also conclude that there must exist some threshold rD such that, for
rD > rD, kreg > kCS.

Comparing the two values of k, kreg <kCS if and only if

kreg =


RrD + rD2 8c (rErD)


8crE RrD + rD 4 у/rEc (4сгеRrD + rD )


= kCS


Rearranging, we obtain the condition for kregkCS < 0 as:

ɪ RRrD + 4crD 8сге + 2qcrE (4сгеRrD + rD)) < 0

Since we know that for low values of rD this condition will be satisfied, but not for higher
values, we can establish that there is a unique threshold where the inequality flips (i.e., that

30



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