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On the welfare cost of bank concentration

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  • Sofía Bauducco
  • Alexandre Janiak

Abstract

We build a model of bank concentration. Banks and entrepreneurs meet in a credit market characterized by search frictions and negotiate repayment rates à la Nash. Banks are large in the sense that they allocate credit to more than one entrepreneur through branches and there is bank heterogeneity in terms of their cost structure. Banks have incentives to overlend, generating a scale inefficiency and overconcentration of banks. We find that this friction also generates too much concentration on the goods market, lowering aggregate output and welfare. We calibrate the model with data on the distribution of branches across banks in the US and available estimates on X-efficiency in the banking sector to assess the quantitative importance of this effect. We find that aggregate output would increase by 2.4% had the scale inefficiency been absent, while loan rates would decrease by 1.2%. JEL classiffications: E44; G21; G28. Key words: Keywords: Bank concentration; Bargaining; Search; Scale inefficiency; X-efficiency.

Suggested Citation

  • Sofía Bauducco & Alexandre Janiak, 2015. "On the welfare cost of bank concentration," Documentos de Trabajo 321, Centro de Economía Aplicada, Universidad de Chile.
    • Handle: RePEc:edj:ceauch:321
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    More about this item

    Keywords

    keywords: bank concentration; bargaining; search; scale inefficiency; x-efficiency.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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