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Schnitzer, Monika (1999): On the role of bank competition for corporate finance and corporate control in transition economies. In: Journal of Institutional and Theoretical Economics (JITE), Vol. 155, No. 1: pp. 22-46
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Banks play a central role in financing and monitoring Firms intransition economies. We study how bank competition affects theefficiency of the credit allocation, the monitoring of firms, and thefirms’ restructuring effort. In our model, banks compete to finance aninvestment project with uncertain return. By screening the firm, a banklearns about its profitability. Surprisingly, we find that an increasein bank competition need not reduce a bank’s screening incentives eventhough it lowers its expected profits. Furthermore, competition has apositive impact on the firm’s restructuring effort. This suggests apositive role for bank competition in transition economies.