Corporate credit issued by commercial banks prevails as one of the main sources of external funding for financing entrepreneurs and firms. In addition, several studies have consistently found that commercial banks specialize into different types of clients as measured by categories such as their size, productivity, economic sector, and financial risk.
The observed specialization of intermediaries and the contractual outcomes in terms of capital structure and interest rate are not exclusive but rather simultaneously determined as a result of the optimal decisions of the agents on both the supply and demand sides of the market. Intermediaries and potential clients have different incentives to select a partner and bargain for the best possible agreement; in reaching such a contract they consider not only their own characteristics but also the competition from alternative substitutes for each other pursuing the same objectives in the market, and also observing the conditions of other relevant markets to them.
Though some alternatives hypothesis have been proposed and tested for explaining these stylized facts in terms for instance of the capacity of the banks for reading firmrs information, distance between clients and banks, or the organizational structure of the banks, the micro foundation of the source of the sorting and market specialization between banks and entrepreneurs in most of these theories is ignored or not fully developed. Moreover, the interpretation of these empirical findings is difficult to sustain given the lack of a common theoretical framework, and the absence of a comprehensive model that rationalizes the equilibrium makes it diffi cult to gather further insights of the equilibrium implications given a change in the environment the agents face.
This paper studies the mechanisms by which matching incentives and heterogeneity from supply and demand for credit jointly determine the structure of the market as defined by the assortative organization of intermediaries and clients, the distribution of credit loans, and the hedonic distribution of interest rates. This study develops a competitive matching model between financial intermediaries and entrepreneurs allowing the agents to select the level of capital traded at the relationship.
The incentive to reach a good match is driven by the complementarity between the productivity of both intermediaries and entrepreneurs in the production of financial services summarized by the level of capital borrowed by the entrepreneur. The proposed framework provides specific equilibrium conditions for both capital and interest rates, and offers a set of testable hypothesis on the organization of the credit market under the stable matching conditions driving the sorting of supply and demand for capital.
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Heterogeneity, Matching, and the Hedonic Structure of the Credit Market
