Proprietary Information, Financial Intermediation, and Research Incentives

We contrast equilibria in loan markets with bilateral bank-borrower ties, in which proprietary knowledge of borrowers is not revealed to product market competitors, with equilibria under multilateral financing in which such knowledge may be shared among competing firms. Using each of these two institutional arrangements, we examine the conditions for existence of equilibrium, its ex ante optimality, and borrowing firms’ incentives to engage in privately costly research. Also explored is the potential for lending banks to coordinate post-invention collusion in product markets by multiple investing firms