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Random utility models of demand for the U.S. commercial banking industry

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  • César Orosco

    ()
    (State Street Associates, Cambridge, MA, USA.)

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    Abstract

    In this paper, we specify a Random Utility Model of Demand for Deposits inthe U.S. Banking Industry, assessing its particular characteristics, such as alarge number of participants, a large number of markets and an unbalancedpanel (many banks participate in only one market and no bank participatesin all markets). We modify the standard models to incorporate the fact thatdeposit balances are different among consumers, in a relationship proportionalto their wealth. Using a unique dataset, we estimate the modeland find that characteristics other than the interest rate, such as branchdensity, state presence, etc. add utility to the consumer. The model is alsohelpful in offering a more realistic set of elasticities among the many bankspresent in the sample. It shows how market shares will respond dependingon the market demographics and current choice set (i.e. offerings of otherbanks). Finally, we use the results of the model to analyze changes in welfareduring the 1994-2002 period. By applying a slightly modified versionof Small and Rosen’s equivalent variations, we find that the consolidationprocess of the late 90s was welfare enhancing, particularly for the middleincome consumer.

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    Bibliographic Info

    Article provided by Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines in its journal Revista de Analisis Economico.

    Volume (Year): 22 (2007)
    Issue (Month): 2 (December)
    Pages: 47-74

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    Handle: RePEc:ila:anaeco:v:22:y:2007:i:2:p:47-74

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    Related research

    Keywords: Random Utility Models; Discrete Choice; Financial Institutions; Banks; Bank Deposits;

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    References

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    1. Timothy H. Hannan & J. Nellie Liang, 1991. "Inferring market power from time-series data: the case of the banking firm," Finance and Economics Discussion Series 147, Board of Governors of the Federal Reserve System (U.S.).
    2. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    3. Santomero, Anthony M., 1999. "Bank mergers: What's a policymaker to do?," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 637-643, February.
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    6. Small, Kenneth A & Rosen, Harvey S, 1981. "Applied Welfare Economics with Discrete Choice Models," Econometrica, Econometric Society, vol. 49(1), pages 105-30, January.
    7. Massa, Massimo, 2003. "How do family strategies affect fund performance? When performance-maximization is not the only game in town," Journal of Financial Economics, Elsevier, vol. 67(2), pages 249-304, February.
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    11. Rhoades, Stephen A., 1998. "The efficiency effects of bank mergers: An overview of case studies of nine mergers," Journal of Banking & Finance, Elsevier, vol. 22(3), pages 273-291, March.
    12. Lawrence J. Radecki, 1998. "The expanding geographic reach of retail banking markets," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 15-34.
    13. Claudia M. Buch & Gayle L. DeLong, 2001. "Cross-Border Bank Mergers: What Lures the Rare Animal?," Kiel Working Papers 1070, Kiel Institute for the World Economy.
    14. Mitchell A. Petersen & Raghuram G. Rajan, 2000. "Does Distance Still Matter? The Information Revolution in Small Business Lending," NBER Working Papers 7685, National Bureau of Economic Research, Inc.
    15. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
    16. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
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    18. Douglas D. Evanoff & Evren Ors, 2002. "Local market consolidation and bank productive efficiency," Working Paper Series WP-02-25, Federal Reserve Bank of Chicago.
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