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Banking competition and capital dependence of the production sector: Growth and welfare implications

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  • Rauber, Tom
  • Ritschel, Paul

Abstract

This article explores how competition among banks affects economic growth and welfare in an overlapping-generations model with rational expectations. We show that monopolistic banking can outperform its competitive counterpart in terms of both growth and welfare if the production sector is capital-intensive. In contrast, competition is beneficial if production is labor-intensive. The capital dependence of the production sector determines the relative importance of agents’ saving incentives and banks’ intermediation margins for capital accumulation. The theory of the second best explains the welfare-enhancing effect of a monopoly since capital accumulation is generally inefficient. We link these findings to empirical evidence.

Suggested Citation

  • Rauber, Tom & Ritschel, Paul, 2024. "Banking competition and capital dependence of the production sector: Growth and welfare implications," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 676-698.
    • Handle: RePEc:eee:reveco:v:89:y:2024:i:pb:p:676-698
    DOI: 10.1016/j.iref.2023.10.011
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    More about this item

    Keywords

    Financial intermediation; Banking competition; Overlapping generations; Financial dependence; Economic growth;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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