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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
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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

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