Working papers

Abstract: When firms choose their capacity and then compete à la Bertrand, the market equilibrium can correspond to the Cournot outcome (Kreps and Scheinkman, 1983). Similarly, banks' capital structure choices determine their lending capacity due to capital requirements. This paper establishes the conditions under which the Bertrand-Cournot equivalence extends to banks. I allow capital to be an imperfect capacity commitment: banks can distribute dividends and raise more capital at a short-term premium in the competition stage. I show that if the loan market is not severely affected by some financial frictions, such as moral hazard, and the short-term premium is sufficiently large, the Cournot outcome is the unique equilibrium of the game. Such micro-foundations for Cournot competition in the loan market open new perspectives to the modelling of an elaborate, yet tractable, banking sector in macroeconomic models.