Bank risk-taking in a mixed duopoly: The role of the state-owned bank

Abstract

We analyze the role of a state-owned bank, whose objective is to maximize social welfare, in a credit market with a mixed duopoly. The equilibrium reveals that the state-owned bank is exposed to lower credit risk than the private bank. Furthermore, when the deposit rate is raised by the monetary authority, both banks exert socially beneficial higher monitoring efforts. In modified models, we explore the effects of the cost-inefficiency and the political view of the state-owned bank. Extensions on partial nationalization, mixed oligopoly with multiple private banks, and the case of loan differentiation with price competition are also discussed.