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Access To Banking And Income Inequality

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Using a simple model of banking services we consider how deposit-taking banks price for their services and choose the type of deposit customers that they target. In considering a banking model with a consumer population heterogeneous in income we go beyond previous theoretical work on consumer banking, allowing us to determine the role of household income in the access to deposit services. In addition we consider the usage and pricing for Alternative Financial Services (AFS) by households left out of the mainstream banking sector. We look to identify how the prices they pay for financial transactions differs from those in the mainstream sector. We show that, all other things equal, a higher rate of return on investments available to banks is an important factor in lowering financial exclusion, increasing the profitability of low-income consumers for deposit-taking institutions. This would suggest that the possibility of financial exclusion increases in periods of recession. In addition, if the bank's ability to invest is connected to financial exclusion, any regulation restricting the bank's ability to make investments should take this into account. Finally, by introducing specific income distributions to our model, we are able to demonstrate how an increase in income dispersion can lead to a greater proportion of consumers excluded from mainstream banking.

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Bibliographic Info

Paper provided by University of Haifa, Department of Economics in its series Working Papers with number WP2012/4.

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Length: 29
Date of creation: 06 Aug 2012
Date of revision: 19 Feb 2012
Handle: RePEc:haf:huedwp:wp201204

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  1. Holmstrom, Bengt & Tirole, Jean, 1997. "Financial Intermediation, Loanable Funds, and the Real Sector," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 663-91, August.
  2. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
  3. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
  4. Chipman, John S., 1974. "The welfare ranking of Pareto distributions," Journal of Economic Theory, Elsevier, vol. 9(3), pages 275-282, November.
  5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  7. GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "Price competition, quality and income disparities," CORE Discussion Papers RP -370, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2005. "Reaching out : access to and use of banking services across countries," Policy Research Working Paper Series 3754, The World Bank.
  9. Andrei Shleifer & Robert W. Vishny, 2009. "Unstable Banking," NBER Working Papers 14943, National Bureau of Economic Research, Inc.
  10. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
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