Abstract
In a model where firms rely on bank financing to build capacity, put up specialized productive assets as collateral, and then compete à la Cournot, we introduce a probability of default. We investigate how the number of competitors affects the equilibrium amount of bank credit and derive conditions under which an inverted U-shaped relationship occurs.On the one hand, more competitors enhance the resale value of collateralized productive assets. On the other hand, more competitors shrink firms’ profits and the resulting income that can be pledged to banks. We then extend the analysis to firms outside the Cournot industry that are willing to buy productive assets in liquidation and show that the equilibrium bank credit becomes monotonically decreasing in the number of competitors.