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The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks

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  • Economides, Nicholas
  • Hubbard, R Glenn
  • Palia, Darius

Abstract

This article suggests that the introduction of bank branching restrictions and federal deposit insurance in the United States likely was motivated by political considerations. Specifically, we argue that these restrictions are instituted for the benefit of the small unit banks that were unable to compete effectively with large, multiunit banks. We analyze this "political hypothesis" in two steps. First, we use a model of monopolistic competition between small and large banks to examine gains to the former group from the introduction of branching restrictions and government-sponsored deposit insurance. We then find strong evidence for the political hypothesis by examining the voting record of Congress. Copyright 1996 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 39 (1996)
Issue (Month): 2 (October)
Pages: 667-704

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Handle: RePEc:ucp:jlawec:v:39:y:1996:i:2:p:667-704

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  1. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  2. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
  3. Waldo, Douglas G., 1985. "Bank runs, the deposit-currency ratio and the interest rate," Journal of Monetary Economics, Elsevier, vol. 15(3), pages 269-277, May.
  4. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  5. Ramakrishnan, Ram T S & Thakor, Anjan V, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 415-32, July.
  6. Economides, Nicholas, 1989. "Symmetric equilibrium existence and optimality in differentiated product markets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 178-194, February.
  7. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-91, June.
  8. Gorton, Gary, 1985. "Bank suspension of convertibility," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 177-193, March.
  9. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  10. George J. Stigler, 1971. "The Theory of Economic Regulation," Bell Journal of Economics, The RAND Corporation, vol. 2(1), pages 3-21, Spring.
  11. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  12. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  13. Victor Goldberg, 1982. "Peltzman on regulation and politics," Public Choice, Springer, vol. 39(2), pages 291-297, January.
  14. Mark D. Flood, 1992. "The great deposit insurance debate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-77.
  15. Edward J. Kane, 1985. "The Gathering Crisis in Federal Deposit Insurance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262611856, December.
  16. David C. Wheelock & Paul W. Wilson, 1994. "Can deposit insurance increase the risk of bank failure? Some historical evidence," Review, Federal Reserve Bank of St. Louis, issue May, pages 57-71.
  17. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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