OVER-BANKED AND CREDIT-STARVED: A PARADOX OF THE TRANSITION Suggested Running Head: OVER-BANKED AND CREDIT-STARVED

This paper demonstrates how the behavior of credit markets in a transition-like environment can be a function of the market structure in the commercial lending sector that was inherited from the pre-reform economy. Using a game theoretic model, we investigate one possible explanation for how a more crowded banking sector can diminish the scale of commercial lending in a market in which information on borrower quality and third party contract enforcement are lacking initially. The model sheds additional light on the stunted development of commercial bank lending in post-Soviet Russia.