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Cultural Affinity, Regulation, and Market Structure: Evidence from the Canadian Retail Banking Industry

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  • Hector Perez-Saiz
  • Hongyu Xiao

Abstract

We estimate a perfect information static entry game to study the effect of cultural entry barriers on entry and competition in the retail banking industry. Canada provides a favorable setting for analysis due to its high linguistic diversity, concentrated market, and regulatory entry barriers. We find that cultural affinity between customers and financial institutions that share a common cultural origin plays an important role in explaining the comparative advantages of these institutions in certain markets. Using several counterfactual experiments and additional empirical evidence, we show that the effectiveness of regulations intended to foster competition is significantly limited by cultural barriers, which is a key determinant that shapes the competitive landscape of the industry.

Suggested Citation

  • Hector Perez-Saiz & Hongyu Xiao, 2022. "Cultural Affinity, Regulation, and Market Structure: Evidence from the Canadian Retail Banking Industry," American Economic Journal: Microeconomics, American Economic Association, vol. 14(1), pages 451-489, February.
    • Handle: RePEc:aea:aejmic:v:14:y:2022:i:1:p:451-89
    DOI: 10.1257/mic.20180044
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    Cited by:

    1. Hurtado, Agustin & Sakong, Jung, 2022. "The effect of minority bank ownership on minority credit," Working Papers 325, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    2. Santiago Carbo-Valverde & Héctor Pérez Saiz & Hongyu Xiao, 2023. "Geographical and Cultural Proximity in Retail Banking," Staff Working Papers 23-2, Bank of Canada.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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