University of Warwick institutional repository: http://go.warwick.ac.uk/wrap A Thesis Submitted for the Degree of PhD at the University of Warwick http://go.warwick.ac.uk/wrap/3505 This thesis is made available online and is protected by original copyright. Please scroll down to view the document itself. Please refer to the repository record for this item for information to help you to cite it. Our policy information is available from the repository home page. MARKET CONCENTRATION, CREDIT INSTITUTIONS AND THE MACROECONOMY MARCO MAZZOLI Dept of Economics University of Warwick ý- ; r' ý. Thesis submitted to the University of Warwick for the qualification of Ph. D. in Economics Date of submission: May 1994 Research conducted at the Department of Economics of the University of Warwick Best Copy Available Print bound close to the spine ý d' ., SUMMARY Chapter one is a brief discussion of a few methodological premises. The second chapter is meant to show (by means of a theoretical analysis) the effective macroeconomic relevance of oligopsony in the market for credit. This is done by using two models. In the first (simplified) model - where the behaviour of the supply function of bank credit to industrial firms is captured by a "Cobb-Douglas" reduced form - an exogenous decrease in the market power of the industrial firms on the credit market increases the effectiveness of monetary policy. In the second model, where the banking sector behaves consistently with the portfolio allocation theory, the results are weakened: it is still true that, apart from extreme cases, reductions in the market power of industrial firms in the credit markets increase the macroeconomic level of investment and affect the monetary policy multiplier, but the sign of the latter effect becomes ambiguous and depends on the analytical forms of the behavioural functions. Both models, however, show that modifications of the market structure in the banking sector have, in general, macroeconomic effects. The third chapter suggests an interpretation of the phenomenon of "securitization" on the basis of Williamson's [1985] contractual framework. It is pointed out that in securitized financial systems substitutability between securities and intermediated credit is an empirically relevant phenomenon that makes the demand for bank credit to industry more unstable than the supply. For this purpose, a comparative econometric analysis has been performed with British and German data, because the two countries had (apart from the phenomenon of securitization) many similarities in their regulatory systems, as well as in the degree of concentration of their banking sectors and in the magnitude of the respective economies, at least until German Unification. The analytical form of the bank credit supply function is based on the "credit view". This specific aspect of the behaviour of banks is analyzed in Chapter 4, which contains an empirical analysis (performed with Italian data) of the free liquidity ratio for commercial banks, interpreted on the basis of the recent literature on investment decisions under conditions of investments' irreversibility and uncertainty. Chapters 5 and 6 examine the interactions between industrial firms and financial intermediaries in a "microeconomic" perspective. The focus is on the investment decision, and one of the main concerns is to perform a theoretical and empirical analysis on the connections between risk, cost of capital and investment decisions. Chapter 5 contains an empirical analysis of the firms' investment decision based on a theoretical model where the decisions concerning investment and the firms' financial structure are taken simultaneously. The results are not conclusive, in part because of the complexity of the causal links among market structure, investment and financing decisions suggested by various contributions in finance as well as in industrial economics. The study of such causal links is precisely the concern of Chapter 6, which contains an analysis of the implications of a few alternative hypotheses (based on precise results of the industrial economics literature) on the link existing between the cost of capital, the market structure and the profit margins. TABLE OF CONTENTS l CHAPTER 1- INTRODUCTION ...................................... p. the 2 1. The purpose of analysis .................................. 2 2. A few methodological premises ................................ 8 3. Starting points and general assumptions ...................... the 17 4. Structure of work ....................................... Chapter 1 24 Bibliography of ...................................... CHAPTER 2- MONETARY POLICY WITH OLIGOPSONY IN THE MARKET FOR 26 CREDIT .......................................................... 1. Introduction 27 ................................................. 2. Monetary policy in a simplified model with oligopsonistic industrial firms in the 29 credit market ........................... 3. banking households 34 A generalization: sector and .............. Monetary Authority 35 3.1'The ...................................... 37 3.2 Households .................................................. Sector 39 3.3 The Banking .......................................... Industrial Sector 45 3.4 The ....................................... Conditions 47 3.5 Equilibrium ...................................... Statics 49 3.6 Comparative ......................................... 56 4. Conclusions .................................................. Chapter 2 58 Bibliography of ....................................... 59 APPENDIX ....................................................... CHAPTER 3- CAPITAL MARKETS' SOPHISTICATION AND BANK LENDING: AN INTERPRETATION IN THE SPIRIT OF 0. WILLIAMSON (1985) AND AN 63 EMPIRICAL ANALYSIS ............................................. 64 1. Introduction. ......................... 2 An interpretation of securitization based on 0. Williamson's framework 66 [1985] contractual relations .......................... 2.1 Securitization: empirical relevance for bank credit and some implications 71 macroeconomic ...................................... 3. An empirical analysis of some macroeconomic implications of the United Kingdom Germany 76 securitization: and .................. 3.1 A Brief description of the econometric methodology.......... 82 83 3.2 General-to-specific and partial adjustment .................. 84 4. The Empirical Results ......................................... 4.1 The United Kingdom 85 .......................................... Germany 89 4.2 ..................................................... 4.3 the demand for 92 A quick comparison with money ............... 5. Conclusions 95 .................................................. Chapter 3 99 Bibliography of ....................................... 102 APPENDIX ....................................................... CHAPTER 4- IS IT MONEY, CREDIT OR BOTH, OR NEITHER? AN EMPIRICAL INVESTIGATION BASED ON THE FREE LIQUIDITY RATIO FOR COMMERCIAL 104 BANKS ........................................................... 105 1. Introduction ................................................. few 107 2. A comments on some standard empirical works .............. 3. A new possible interpretation of the free liquidity ratio for banks 110 commercial ................................................ 115 4. The model .................................................... 5. 128 Conclusions .................................................. Chapter 4 130 Bibliography of ....................................... 133 APPENDIX ........................................................ CHAPTER -5 OPTIMAL PHYSICAL CAPITAL AND FINANCIAL STRUCTURE OF THE OF THE SAME DECISION? 134 FIRM: TWO FACES ............................ 1. Introduction_ ........................................... 135 2. A model of financing and investment with asymmetric information bankruptcy and costs ............................................. 139 2.1 implementation The empirical ................................. 146 2.2 dataset the the data The and use of .......................... 151 3. The empirical results ........................................ 156 4. Conclusions ................................................... 166 Bibliography Chapter 5 of ........................................ 168 1 APPENDIX ....................................................... 172 2 APPENDIX ....................................................... 175 CHAPTER 6- CONTROLLING GROUPS, MARKET POWER, AND THE COST OF CAPITAL IN A NON-SECURITIZED FINANCIAL SYSTEM: AN ALTERNATIVE INTERPRETATION OF THE FIRMS' INVESTMENT DECISION 181 ................. 1. Introduction- ............................................... 182 2. The assumptions the main of analysis .......................... 183 3. A digression on the cost of capital and the "financial side of the firm" ........................................................ 193 decision the firm 4. The problem of ............................. 202 financial decisions the firm 5. The of ........................... 204 "real" decisions the firm 6. The of ............................. 212 7. Conclusions ................................................... 217 Chapter 6 Bibliography of ........................................ 219 7 CONCLUDING CHAPTER REMARKS ..................................... 223 Chapter 7 Bibliography of ........................................ 229 1 CHAPTER 1 INTRODUCTION While the acknowledgments are reported separately for each single chapter of this