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Review of Finance Advance Access originally published online on December 25, 2008
Review of Finance 2009 13(2):369-400; doi:10.1093/rof/rfn032
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© The Authors 2008. Published by Oxford University Press on behalf of the European Finance Association. All right reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

A Welfare Analysis of Regulation in Relationship Banking Markets

Bruce Ian Carlin1 and Rafael Rob2

1 Anderson School of Management, University of California at Los Angeles
2 Department of Economics, University of Pennsylvania

The increasing dependence of individuals on debt financing raises several welfare considerations that we analyze in this paper. We develop a dynamic, competitive model of relationship banking to determine how regulation influences borrowing and lending behavior, and analyze how it affects welfare in the market. We characterize the lending regimes that arise based on public policy, and evaluate the optimal choice by the government to induce particular lending practices to arise. Finally, we consider the effect that a credit reporting agency has on the market. In the paper, we highlight the new empirical implications that the model generates.

JEL Classification: G21


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