Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-29T22:24:33.776Z Has data issue: false hasContentIssue false
  • English
  • Français

CONCENTRATION IN THE BANKING INDUSTRY AND ECONOMIC GROWTH

Published online by Cambridge University Press:  28 April 2005

LUCA DEIDDA  and
BASSAM FATTOUH
LUCA DEIDDA
Affiliation:
University of London and CRENoS
BASSAM FATTOUH
Affiliation:
University of London
Get access Rights & Permissions [Opens in a new window]

Abstract

We present an endogenous growth model with two sectors: a real sector where the final good is produced, and a banking sector that intermediates between savers and firms. Banking concentration exerts two opposite effects on growth. On the one hand, it induces economies of specialization, which is beneficial to growth. On the other hand, it results in duplication of banks' investment in fixed capital, which is detrimental to growth. The trade-off between the two opposing effects is ambiguous and can vary along the process of economic development. Hence, there is a potential nonlinear and nonmonotonic relationship between concentration and growth. We test this implication, using cross-country data on income and industry growth. We find that banking concentration is negatively associated with per-capita income growth and industrial growth only in low-income countries. This suggests that reducing concentration is more likely to promote growth in low-income countries than in high-income ones.

Keywords

Economic GrowthEconomic DevelopmentConcentrationBanking Industry
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 9 , Issue 2 , April 2005 , pp. 198 - 219
Copyright
© 2005 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acemoglu D. & F. Zilibotti 1997 Was Prometeus unbound by chance? Risk, diversification and growth. Journal of Political Economy 105, 709– 755.Google Scholar
Aghion P. & P. Howitt 1998 Endogenous Growth Theory. Cambridge, MA: MIT Press.
Barro R. & X. Sala-ì-Martin 1992 Convergence. Journal of Political Economy 100, 223– 251.Google Scholar
Barro R. & X. Sala-ì-Martin 1995 Economic Growth. New York: McGraw-Hill.
Beck T., A. Demirguc-Kunt, R. Levine & V. Maksimovic 2001 Financial structure and economic development: Firm, industry, and country evidence. In A. Demirguc-Kunt & R. Levine (eds.), Financial Structure and Economic Growth, pp. 189– 241. Cambridge, MA: MIT Press.
Bencivenga V.R. & B.D. Smith 1991 Financial intermediation and endogenous growth. Review of Economic Studies 58, 195– 209.Google Scholar
Bencivenga V.R. & B.D. Smith 1993 Some consequences of credit rationing in an endogenous growth model. Journal of Economic Dynamics and Control 17, 97– 122.Google Scholar
Bencivenga V.R. & B.D. Smith 1995 Transaction costs, technological choice, and endogenous growth. Journal of Economic Theory 67, 153– 177.Google Scholar
Black S. & P. Strahan 2002 Entrepreneurship and bank credit availability. Journal of Finance 67, 2807– 2833.Google Scholar
Boyd J.H. & B.D. Smith 1998 The evolution of debt and equity markets in economic development. Economic Theory 12, 519– 560.Google Scholar
Cetorelli N. & P. Peretto 2000 Oligopoly Banking and Capital Accumulation. Chicago FED working paper 2000-12, Federal Reserve Bank of Chicago.
Cetorelli N. & M. Gambera 2001 Banking market structure, financial dependence and growth: International evidence from industry data. Journal of Finance 56, 617– 648.Google Scholar
Davidson R. & J.G. MacKinnon 1993 Estimation and Inference in Econometrics. New York: Cambridge University Press.
De Gregorio J. 1993 Inflation, taxation, and long-run growth. Journal of Monetary Economics 31, 271– 298.Google Scholar
Degryse H. & S. Ongena 2002 Distance, lending relationships, and competition. CSEF working paper 80, University of Salerno.
Demirguc-Kunt A., L. Laeven & R. Levine (in press) Market structure, institutions, and the cost of financial intermediation. Journal of Money, Credit and Banking.
Gehrig T. 1998 Screening, Market Structure, and the Benefits from Integrating Loan Markets. Mimeo, Universitat Freiburg.
Greenwood J. & B. Jovanovic 1990 Financial development, growth and the distribution of income. Journal of Political Economy 98, 1076– 1107.Google Scholar
Harrison P., O. Sussman & J. Zeira 1999 Finance and Growth: Theory and Evidence. FEDS papers series 35, Federal Reserve Board.Google Scholar
Khan A. 2001 Financial development and economic growth. Macroeconomic Dynamics 5, 413– 433.Google Scholar
King R.G. & R. Levine 1993a Finance and growth: Schumpeter might be right. Quarterly Journal of Economics 109, 717– 737.Google Scholar
King R.G. & R. Levine 1993b Finance, entrepreneurship and growth: Theory and experience. Journal of Monetary Economics 32, 513– 542.Google Scholar
Levine R. 1991 Stock markets, growth, and tax policy. Journal of Finance 46, 1445– 1465.Google Scholar
Levine R. 1997 Financial development and economic growth: Views and agenda. Journal of Economic Literature 35, 688– 726.Google Scholar
Levine R., N. Loayza & T. Beck 2000 Financial intermediation and growth: Causality and causes. Journal of Monetary Economics 46, 31– 77.Google Scholar
Manove M., A.J. Padilla & M. Pagano 2001 Collateral vs. project screening: A model of lazy banks. Rand Journal of Economics 32, 726– 747.Google Scholar
Pagano M. 1993 Financial markets and growth: An overview. European Economic Review 37, 613– 622.Google Scholar
Petersen M.A. & R.G. Rajan 1995 The effect of credit market competition on lending relationships. Quarterly Journal of Economics 110, 407– 443.Google Scholar
Rajan R.G. & L. Zingales 1998 Financial dependence and growth. American Economic Review 88, 559– 586.Google Scholar
Riordan M. 1993 Competition and bank performance: A theoretical perspective. In C. Mayer & X. Vives (eds.), Capital Markets and Financial Intermediation, pp. 328– 343. Cambridge, UK: Cambridge University Press.
Roubini N. & X. Sala-ì-Martin 1995 A growth model of inflation, tax evasion, and financial repression. Journal of Monetary Economics 35, 275– 301.Google Scholar
Saint-Paul G. 1992 Technological choice, financial markets, and economic development. European Economic Review 36, 763– 781.Google Scholar
Sargan J.D. 1964 Wages and prices in the UK. In P.G. Hart, G. Mills & J.K. Whittaker (eds.), Econometric Analysis for National Economic Planning, pp. 29– 59. London: Butterworth.
Shaffer S. 1998 The winner's curse in banking. Journal of Financial Intermediation 7, 359– 392.Google Scholar
Sussman O. 1993 A theory of financial development. In A. Giovannini (ed.), Finance and development: Issues and experience, pp. 29– 57. Cambridge, UK: Cambridge University Press.
Sussman O. & G. Zeira 1995 Banking and Development. CEPR discussion paper 1127, Centre for Economic Policy Research.Google Scholar