Switching Cost and Deposit Demand in China

Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 06/2014

International Economic Review, Volume 56, Issue 3, August 2015, Pages 723-749

44 Pages Posted: 25 Mar 2014 Last revised: 29 Jul 2022

Multiple version iconThere are 2 versions of this paper

Date Written: March 23, 2014

Abstract

This working paper was written by Chun-Yu Ho (Shanghai Jiao Tong University).

This paper develops and estimates a dynamic model of consumer demand for deposits in which banks provide differentiated products and product characteristics that evolve over time. Existing consumers are forward-looking and incur a fixed cost for switching banks, whereas incoming consumers are forward-looking but do not incur any cost for joining a bank. The main finding is that consumers prefer banks with more employees and branches. The switching cost is approximately 0.8% of the deposit’s value, which leads the static model to bias the demand estimates. The dynamic model shows that the price elasticity over a long time horizon is substantially larger than the same elasticity over a short time horizon. Counterfactual experiments with a dynamic monopoly show that reducing the switching cost has a comparable competitive effect on bank pricing as a result of reducing the dominant position of the monopoly.

Keywords: Banks in China, Demand Estimation, Switching Cost

JEL Classification: G21, L10

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Switching Cost and Deposit Demand in China (March 23, 2014). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 06/2014, International Economic Review, Volume 56, Issue 3, August 2015, Pages 723-749, Available at SSRN: https://ssrn.com/abstract=2413308 or http://dx.doi.org/10.2139/ssrn.2413308

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