Journal Article The Interaction between Product Market and Financing Strategy: The Role of Venture Capital Get access Thomas Hellmann, Thomas Hellmann Stanford University Search for other works by this author on: Oxford Academic Google Scholar Manju Puri Manju Puri Stanford University Address correspondence to Manju Puri, Graduate School of Business, Stanford University, Stanford, CA 94305-5015, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 4, October 2000, Pages 959–984, https://doi.org/10.1093/rfs/13.4.959 Published: 15 June 2015

In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also have a perverse effect of harming banks' franchise values, thus encouraging gambling. Pareto-efficient outcomes can be achieved by adding deposit-rate controls as a regulatory instrument, since they facilitate prudent investment by increasing franchise values. Even if deposit-rate ceilings are not binding on the equilibrium path, they may be useful in deterring gambling off the equilibrium path.