Bank Competition and Enterprise restructuring in Transition Economies

We investigate how bank competition affects the efficiency of credit allocation, using a model of spatial competition. Our analysis shows that bad loans are more likely the larger the number of banks competing for customers. We study further how many banks will be active if market entry is not regulated. Free entry can induce too much entry and thus too many bad loans compared to the social optimum. Finally, we analyse how bank competition affects the firms' restructuring effort. We find that restructuring has positive externalities that give rise to multiple equilibria, with either much or little restructuring activity.