Relationship lending under asymmetric information: A case of blocked entry

A national bank with a low cost of capital can choose to enter a two-period credit market and compete with incumbent banks to supply relationship loans to de novo entrepreneurs. Under short-term contracting, the terms on loan contracts are determined by market competition in the current period. In this setting, we find that the second period competitive pressure the national bank exerts on the incumbent banks turns out to give the incumbent banks a first period advantage when trying to attract new clients. As a result, the low cost bank may be blocked from entering the market. (c) 2005 Elsevier B.V. All rights reserved.