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Laura Spierdijk and Michalis Zaouras

We analyze the “other side” of the competition–risk nexus in a setting of endogenous bank risk by expressing the Lerner index as a function of risk-related parameters and other determinants. Our main result is that banks’ ability to raise prices above the competitive level depends, among other things, on the extent to which lenders respond to an increase in the loan rate by taking more risk. This finding illustrates that differences in Lerner indices may arise as a result of differences in risk-taking behavior.