Since the 1960s, finance has been based on either pure arbitrage or principal-agent relationships. This study shifts away from the Modigliani-Miller framework of pure arbitrage while maintaining a focus on equilibria, turning the principal-agent dynamic on its head. In this perspective, firms become principals and banks act as agents in an auction market context. This new understanding of credit relationships reveals several insights, notably that overly close ties between banks and borrowers can diminish competition in credit markets. Michael Tröge presents an antitrust rationale for limiting bank involvement with non-financial firms. While this issue is less pertinent in the U.S., where legal responsibilities restrict banks' influence over firms, it is a significant concern in continental Europe, where such relationships are common and debated. The author first examines how banks' information about borrower quality affects credit market competitiveness. Accurate information can provide banks with a competitive edge, but it incurs costs. Tröge analyzes the information acquisition strategies in a strategic duopoly, revealing that an excess of banks can lead to excessive spending on information gathering.
