Abstract
This paper aims at studying the relationship between competition and efficiency in banking. Its framework is a model of spatial competition with horizontal differentiation on costs which banks incur when they monitor borrowers. We then show that the increase of the number of banks impacts negatively on banking efficiency. We empirically check this relationship by running a regression between some concentration indices and the average cost efficiency of banks, estimated by the distribution-free approach, for several OECD member countries : we find a significant positive correlation between concentration and average efficiency.
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