Economic Regulation in the Consumer Loans Market

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Economic Regulation in the Consumer Loans Market Nobuhiro Mori 1 & Makoto Okamura 2 Takao Ohkawa 3


# International Atlantic Economic Society 2020

Abstract This paper models a consumer loan market with a vertical structure where an upstream monopolist supplies funds to downstream nonbanks. The nonbanks supply funds to consumers in the consumer loans market. An inverse demand function of the consumer is linear. The downstream nonbank freely enters the market as long as it earns a positive profit. First, this paper derives free-entry equilibrium without government regulation. Next, this paper examines the effects of government regulation on the entry of nonbanks. Two regulatory schemes are investigated: partial regulation, wherein the government can only control the interest rate the monopolist sets, and full regulation, wherein the government can control the number of nonbanks as well as the interest rate. This paper presents four new results. First, downstream firms insufficiently enter the market under partial regulation. Second, downstream firms excessively enter the market under full regulation. Third, the establishment of the upstream public firm improves welfare even though its profit is negative under partial regulation. Fourth, full regulation is welfare improving compared to partial regulation. Keywords Consumer loan market . Vertical structure . Partial regulation . Full regulation . Insufficient entry theorem . Welfare improving public firm with loss JEL D43 . G21 . L13

* Makoto Okamura Andrew–[email protected]


Nara University of Education, Nara, Japan


Hiroshima University, Higasihiroshima, Hiroshima, Japan


College of Economics, Deparment of Economics, Ritsumeikan University, Shiga, Japan

Mori N. et al.

Introduction Governments in major advanced countries tightly regulated their financial markets until the 1970s. For example, in Japan, almost all aspects ranging from interest rates to branching have been explicitly controlled by the central government during the rapid growth era of the mid-1950s to the mid-1970s. Private banks in Japan could be essential public financial institutions. Since the 1980s and 1990s, waves of deregulation have gradually developed globally, and privatization in the banking sector has emerged. In contrast to the banking sector deregulation, the non-banking sector has remained unchanged. In the non-banking sector, especially the consumer loan market, consumer loan companies mainly raise funds from financial institutions, such as banks, and provide unsecured loans to individual consumers. Since a registration rather than a license system has been adopted in this industry, nonbanks can enter the market more freely than banks. It is plausible that both upstream banks and downstream nonbanks engage in imperfect competition due to entry regulation. Then, the following question can be asked. Does privatization (or deregulation) in the upstream-banking sector stimulate excessive or insufficient entry in the downstream consumer loan market from the economic-welfare