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On Network Competition And The Solow Paradox: Evidence From Us Banks

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  • SUSHANTA K. MALLICK
  • SHIRLEY J. HO

Abstract

In this paper we develop a model to examine the effect of information technology (IT) in the banking industry. IT can reduce operational cost and create network externality. Empirical studies, however, have shown inconsistency, the so-called Solow paradox, which we explain by stressing the heterogeneity in banking services. In a differentiated model, we characterize the conditions to identify these two effects and explain how the two seemingly positive effects turn negative. Using a panel data set of 68 US banks over 1986-2005, our results show that the profitability effect of IT spending is negative, reflecting a negative network competition effect in the banking industry. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd and The University of Manchester.

Suggested Citation

  • Sushanta K. Mallick & Shirley J. Ho, 2008. "On Network Competition And The Solow Paradox: Evidence From Us Banks," Manchester School, University of Manchester, vol. 76(s1), pages 37-57, September.
  • Handle: RePEc:bla:manchs:v:76:y:2008:i:s1:p:37-57
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