Proprietary Information, Financial Intermediation and Research Incentives

We contrast equilibria in loan markets under bilateral bank-borrower relationships, in which proprietary technological knowledge of borrowers is not revealed to product market competitors, with equilibria under multilateral financing which may lead to such knowledge being shared across product market competitors. We examine the conditions for equilibrium existence, ex ante efficiency, and incentives to do privately costly knowledge-generating R&D, under these two differing institutional mechanisms for financing R&D-intensive investments by firms competing in product markets. The potential for banks to facilitate collusion in product markets, by multiple inventing firms, is also explored. 

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