We develop a dynamic general equilibrium model of capital accumulation
where credit is intermediated by banks operating in a Cournot
oligopoly. The number of banks affects capital accumulation through
two channels. First, it affects the quantity of credit available to entrepreneurs.
Second, it affects banks’ decisions to collect costly information
about entrepreneurs, and thus determines the efficiency of the
credit market. We show that under plausible conditions, the market
structure that maximizes the economy’s steady-state income per capita
is neither a monopoly nor competition, but an intermediate oligopoly.
Moreover, the credit market splits in two segments: one in which loans
are screened and only high quality entrepreneurs obtain credit, and
one in which banks extend credit indiscriminately to all entrepreneurs.
The relative size of the two segments depends on the market power of
banks and evolves endogenously along the path of capital accumulation.
We thus obtain the prediction that the banking sector becomes
more sophisticated as the economy develops.