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Market entry, privatization and bank performance in transition

  • Steven Fries
  • Damien Neven
  • Paul Seabright
  • Anita Taci

This paper examines how market entry and privatization have affected the margins and marginal costs of banks in the post-communist transition. We estimate bank revenue and cost functions, allowing the estimated parameters to change over time. In the first sub-period (1995-98), we find that privatized banks earned higher margins than other banks, while foreign start-ups had lower marginal costs. In the third sub-period (2002-2004), foreign banks remained low marginal cost service providers, while privatized domestic banks had the widest margins. Subtracting marginal costs from margins to calculate mark-ups, an indication of demand for services, shows that initially privatized banks had the largest mark-ups. However, by the third sub-period, differences among private banks diminished. In comparison to private banks, state banks persistently under-performed in controlling costs and attracting demand. Our evidence therefore indicates that foreign bank entry promoted lower costs and that privatization and market entry encouraged more demand for services. Copyright (c) 2006 The Authors Journal compilation (c) 2006 The European Bank for Reconstruction and Development..

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Article provided by The European Bank for Reconstruction and Development in its journal Economics of Transition.

Volume (Year): 14 (2006)
Issue (Month): 4 (October)
Pages: 579-610

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Handle: RePEc:bla:etrans:v:14:y:2006:i:4:p:579-610
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