Cross Selling and Banking Efficiency
Luis M. B. Cabral
New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)
João A. C. Santos
Federal Reserve Bank of New York
We show that efficiency is greater when financial institutions simultaneously offer different products, such as banking, insurance and investment banking (cross selling). Our results are based on the fact that offering multiple products improves the no-deviation constraints of the implicit contract established between a buyer and a seller in a world of one-sided or two-sided moral hazard. The results do not depend on cost synergies or efficiencies in information gathering (though these may imply greater economies from cross selling). Our analysis suggests that, when market competition is sufficiently intense and diseconomies of scope are not very significant, banks will only survive if they follow the strategy of cross selling.
Number of Pages in PDF File: 19
Keywords: cross selling, commercial banking, investment banking, insurance
JEL Classification: G21, G22, G24
Date posted: November 7, 2001
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