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Banking competition and welfare

Author

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  • Marcella Lucchetta

    (University of Venice)

Abstract

We develop a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents. We show that more bank competition results in lower economy-wide risk, higher social welfare, lower bank capital ratios, more efficient production plans and Pareto-ranked real allocations. Perfect competition supports a second best allocation and optimal levels of bank risk and capitalization. These results are at variance with those obtained by a large literature that has studied a similar environment in partial equilibrium, they are empirically relevant, and carry significant implications for policy guidance.

Suggested Citation

  • Marcella Lucchetta, 2017. "Banking competition and welfare," Annals of Finance, Springer, vol. 13(1), pages 31-53, February.
    • Handle: RePEc:kap:annfin:v:13:y:2017:i:1:d:10.1007_s10436-016-0288-2
    DOI: 10.1007/s10436-016-0288-2
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    References listed on IDEAS

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    Cited by:

    1. Jonathan Benchimol & Caroline Bozou, 2022. "Desirable Banking Competition and Stability," Bank of Israel Working Papers 2022.18, Bank of Israel.

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    More about this item

    Keywords

    Banking competition; General equilibrium; Welfare;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G01 - Financial Economics - - General - - - Financial Crises
    • G2 - Financial Economics - - Financial Institutions and Services
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D6 - Microeconomics - - Welfare Economics

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