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Rational herding and the spatial clustering of bank branches: an empirical analysis

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  • Angela Chang
  • Shubham Chaudhuri
  • Jith Jayaratne
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    Abstract

    Bank branches in New York City tend to be spatially clustered. For instance, of the 221 branches that were opened in New York City between July, 1990 and June, 1995, 181 (or 82 percent) were opened in census tracts that already had at least one other branch. A number of recent theoretical papers have highlighted the possibility of rational herding in various arenas of economic activity. This paper explores empirically whether the apparent clustering of bank branches can be at least partially attributed to rational herding by banks. We find that even after controlling for the expected profitability of operating a branch in an area, branch openings follow other, existing branches. Moreover, such bandwagon behavior appears to reduce branch profits. These findings, combined, suggest that herd behavior may be a factor in the branch location decisions of banks.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9724.

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    Date of creation: 1997
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    Handle: RePEc:fip:fednrp:9724

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    Keywords: Branch banks;

    References

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    1. Gul, Faruk & Lundholm, Russell, 1995. "Endogenous Timing and the Clustering of Agents' Decisions," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1039-66, October.
    2. Bikhchandani, Sushil & Hirshleifer, David & Welch, Ivo, 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change in Informational Cascades," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 992-1026, October.
    3. Welch, Ivo, 1992. " Sequential Sales, Learning, and Cascades," Journal of Finance, American Finance Association, vol. 47(2), pages 695-732, June.
    4. Tootell, Geoffrey M B, 1996. "Redlining in Boston: Do Mortgage Lenders Discriminate against Neighborhoods?," The Quarterly Journal of Economics, MIT Press, vol. 111(4), pages 1049-79, November.
    5. Marc Dudey, 1988. "Competition by choice," International Finance Discussion Papers 327, Board of Governors of the Federal Reserve System (U.S.).
    6. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
    7. Lang William W. & Nakamura Leonard I., 1993. "A Model of Redlining," Journal of Urban Economics, Elsevier, vol. 33(2), pages 223-234, March.
    8. Kenneth Hendricks & Dan Kovenock, 1989. "Asymmetric Information, Information Externalities, and Efficiency: The Case of Oil Exploration," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 164-182, Summer.
    9. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
    10. DeCoster Gregory P. & Strange William C., 1993. "Spurious Agglomeration," Journal of Urban Economics, Elsevier, vol. 33(3), pages 273-304, May.
    11. Zwiebel, Jeffrey, 1995. "Corporate Conservatism and Relative Compensation," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 1-25, February.
    12. Robert B. Avery, 1991. "Deregulation and the location of financial institution offices," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 30-42.
    13. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
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    Cited by:
    1. Dorothea Schäfer & Boriss Siliverstovs & Eva Terberger, 2005. "Banking Competition, Good or Bad?: The Case of Promoting Micro and Small Enterprise Finance in Kazakhstan," Discussion Papers of DIW Berlin 479, DIW Berlin, German Institute for Economic Research.
    2. Claudia M. Buch & Alexander Lipponer, 2006. "Clustering or Competition? The Foreign Investment Behavior of German Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
    3. Lisa Mohanty & Gary Dymski, 1999. "Credit and Banking Structure: Asian and African-American Experience in Los Angeles," American Economic Review, American Economic Association, vol. 89(2), pages 362-366, May.

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