PROPRIETARY INFORMATION, FINANCIAL INTERMEDIATION, AND RESEARCH INCENTIVES

We contrast equilibria in loan markets with bilateral bank-borrower ties, in which proprietary technological knowledge of borrowers is not revealed to product market competitors, with equilibria under multilateral financing in which such knowledge may be shared among competing borrowing 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 private costly research. Also explored is the potential for lending banks to coordinate postinvention collusion in product markets by multiple inventing firms. Journal of Economic Literature Classification Numbers: 310, 3121 314. (C) 1995 Academic Press, lnc.