Is there a tradeoff between bank competition and financial fragility?

We use a model of mean-shifting investment technologies to study the relationship between market structure, risk taking and social welfare in lending markets. Introduction of loan market competition is shown to reduce lending rates and to generate higher investments without increasing the equilibrium bankruptcy risk of borrowers. Hence, there need not be a tradeoff between lending market competition and financial fragility. Such a tradeoff may not emerge either when banks compete by conditioning interest rates on investment volumes irrespectively of whether credit rationing takes place or not. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: 21; G33; G34.