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Does Market Concentration Preclude Risk Taking in Baking?

Author

Listed:
  • Kaniska Dam

    (Department of Economics and Finance, Universidad de Guanajuato)

  • Santiago Sanchez Pages

    (Department of Economics, University of Edinburgh)

Abstract

We analyse risk-taking behaviour of banks in the context of a model based on spatial competition. Banks mobilise deposits by offering deposit rates. We show that when the market concentration is low, banks invest in the gambling asset. On the other hand, for sufficiently high levels of market concentration, all banks choose the prudent asset to invest in, and some depositors may even be left out of the market. Our results suggest a discontinuous relation between market concentration and social welfare.

Suggested Citation

  • Kaniska Dam & Santiago Sanchez Pages, 2003. "Does Market Concentration Preclude Risk Taking in Baking?," Department of Economics and Finance Working Papers EC200302, Universidad de Guanajuato, Department of Economics and Finance, revised Feb 2004.
    • Handle: RePEc:gua:wpaper:ec200302
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    References listed on IDEAS

    as
    1. Repullo, Rafael, 2004. "Capital requirements, market power, and risk-taking in banking," Journal of Financial Intermediation, Elsevier, vol. 13(2), pages 156-182, April.
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    3. Chiappori, Pierre-Andre & Perez-Castrillo, David & Verdier, Thierry, 1995. "Spatial competition in the banking system: Localization, cross subsidies and the regulation of deposit rates," European Economic Review, Elsevier, vol. 39(5), pages 889-918, May.
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    More about this item

    Keywords

    Financial intermediation; Risk-taking; Market concentration;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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