On the role of bank competition for corporate finance and corporate control in transition economies

Banks play a central role in financing and monitoring Firms in transition e conomies. We study how bank competition affects the efficiency of the credi t allocation, the monitoring of firms, and the firms' restructuring effort. In our model, banks compete to finance an investment project with uncertai n return. By screening the firm, a bank learns about its profitability. Sur prisingly, we find that an increase in bank competition need not reduce a b ank's screening incentives even though it lowers its expected profits. Furt hermore, competition has a positive impact on the firm's restructuring effo rt. This suggests a positive role for bank competition in transition econom ies.