ANTI-COMPETITIVE FINANCIAL CONTRACTING: THE DESIGN OF FINANCIAL CLAIMS.



This point is intuitively clear, and is confirmed by historical evidence on
the joint evolution of capital market institutions and industry structure. Davis
(1966) provides several case studies of emerging industries in 19th century
U.S. and U.K to argue that in the U.S. “some firms were more successful
than others in their search for ‘informal finance’, and the successful firms grew
at the expense of their less fortunate competitors. As a result, industrial
concentration increased in the affected industries.” Conversely, in England,
“because the capital markets were better”, industries “did not become unduly
concentrated”. It is surprising therefore, that the idea has not received more
attention in the literature. In fact, previous theoretical work assessing the
impact of credit market competition has instead taken a partial equilibrium
approach, abstracting from any interaction with other markets.
19 This may
have led to policy prescriptions biased in favor of credit market concentration.
Our paper is among the first to show that countries with poorly competitive
financial markets may risk the emergence of industrial concentration. In light
of this new theory, we argue that the anti-trust monitoring of financial and
product markets should be better coordinated.

6 Two Applications

6.1 Banking Regulation

In some countries, and at some times in the past, the banking industry has not
been perfectly competitive. These settings provide an application for our the-
ory. For example, De Long (1990) argues persuasively that there were severe
barriers to entry (mainly in the form of reputational capital) in the investment
banking industry in the US in the early twentieth century. He argues that
although the investment bankers performed a useful monitoring and certifi-
cation role, ”some share of the increase in value almost surely arose because
investment banker[s]...aided the formation of oligopoly.” Later he remarks
that “Often ‘Morganization’ meant the creation of value for shareholders by
the extraction of monopoly rents from consumers”. Our theory explains how
this was possible, and also why the Glass-Steagall Act (1933) (which prohibits
equity-holding by commercial banks) put an end to so-called financial capital-
into a more serious commitment problem for the investor, implying a more high-powered
claim if the Coase problem is to be solved.

19 See for instance Petersen and Rajan (1995) or Matutes and Vives (1996). A notable
exception is Gonzalez-Maestre and Granero (1999) who allow industry and credit-market
structure to be determined endogenously and simultaneously as firms need bank loans to
enter the market. However, in that model, the terms of the bank-firm repayments are made
contingent on the number of competitors that are funded to enter the market, so the Coase
problem does not arise.

19



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