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Random utility models of demand for the U.S. commercial banking industry

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  • César Orosco

    () (State Street Associates, Cambridge, MA, USA.)

Abstract

In this paper, we specify a Random Utility Model of Demand for Deposits inthe U.S. Banking Industry, assessing its particular characteristics, such as alarge number of participants, a large number of markets and an unbalancedpanel (many banks participate in only one market and no bank participatesin all markets). We modify the standard models to incorporate the fact thatdeposit balances are different among consumers, in a relationship proportionalto their wealth. Using a unique dataset, we estimate the modeland find that characteristics other than the interest rate, such as branchdensity, state presence, etc. add utility to the consumer. The model is alsohelpful in offering a more realistic set of elasticities among the many bankspresent in the sample. It shows how market shares will respond dependingon the market demographics and current choice set (i.e. offerings of otherbanks). Finally, we use the results of the model to analyze changes in welfareduring the 1994-2002 period. By applying a slightly modified versionof Small and Rosen’s equivalent variations, we find that the consolidationprocess of the late 90s was welfare enhancing, particularly for the middleincome consumer.

Suggested Citation

  • César Orosco, 2007. "Random utility models of demand for the U.S. commercial banking industry," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 22(2), pages 47-74, December.
  • Handle: RePEc:ila:anaeco:v:22:y:2007:i:2:p:47-74
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    References listed on IDEAS

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    More about this item

    Keywords

    Random Utility Models; Discrete Choice; Financial Institutions; Banks; Bank Deposits;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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