Loanable funds versus money creation in banking: a benchmark result

We establish a benchmark result for the relationship between the loanable-funds and the money-creation approach to banking. In particular, we show that both processes yield the same allocations when there is no uncertainty. In such cases, using the much simpler loanable-funds approach as a shortcut does not imply any loss of generality. When there is aggregate risk with complete contracts and complete markets, we indicate that a restricted equivalence result holds.

Downstream competition and profits under different input price bargaining structures

In a vertically related duopoly with input price bargaining, this paper re-examines the downstream firms’ profitability under different market competition degrees. It is shown the rather counterintuitive result that downstream firms earn highest profits with semi-collusion, whose level depends on the upstream bargaining structures, the relative parties’ bargaining power, and the parameters measuring the degree of product differentiation in the downstream market. Concerning social welfare, the key result is that policymakers can tolerate some degree of collusion with decentralized bargaining structures; centralized structures advise for a more procompetitive policy.

Informal input suppliers, quality choice and welfare

This paper proposes a theoretical model in which a formal upstream firm competes against informal input suppliers, which constitute an alternative, albeit lower-quality input source for formal downstream firms. The existence of an alternative source increases competition in the industry, which tends to be welfare-increasing. However, it may also distort the incentives of the formal upstream firm to invest in quality upgrading. Assuming quantity competition downstream, we analyze how these incentives change and whether the negative welfare effect of a reduced investment by the upstream firm may more than offset the positive welfare effect of increased competition brought about by informal input suppliers. We find that there are parameter values such that this is the case, and welfare decreases if informal input suppliers are present. We analyze the robustness of this result to alternative modeling assumptions, such as price competition downstream and the use of two-part tariffs by the formal upstream firm.