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On Network Competition And The Solow Paradox: Evidence From Us Banks

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  • SUSHANTA K. MALLICK
  • SHIRLEY J. HO

Abstract

In this paper we develop a model to examine the effect of information technology (IT) in the banking industry. IT can reduce operational cost and create network externality. Empirical studies, however, have shown inconsistency, the so‐called Solow paradox, which we explain by stressing the heterogeneity in banking services. In a differentiated model, we characterize the conditions to identify these two effects and explain how the two seemingly positive effects turn negative. Using a panel data set of 68 US banks over 1986–2005, our results show that the profitability effect of IT spending is negative, reflecting a negative network competition effect in the banking industry.

Suggested Citation

  • Sushanta K. Mallick & Shirley J. Ho, 2008. "On Network Competition And The Solow Paradox: Evidence From Us Banks," Manchester School, University of Manchester, vol. 76(s1), pages 37-57, September.
    • Handle: RePEc:bla:manchs:v:76:y:2008:i:s1:p:37-57
    DOI: 10.1111/j.1467-9957.2008.01080.x
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