Market Structure, Welfare and Banking Reform in China

46 Pages Posted: 4 Mar 2008

See all articles by Chun-Yu Ho

Chun-Yu Ho

State University of New York (SUNY) - Department of Economics

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Date Written: February 2008

Abstract

This paper examines the effects of market deregulation on consumers and state commercial banks in a developing country. I jointly estimate a system of differentiated product demand and pricing equations under alternative market structures. Overall, I find mixed results for the banking reform. Although total surplus of the deposit market increases, some existing consumers experience welfare losses. Encouragingly, the market appears to be better characterized by non-cooperative competitive behavior than collusion, and price-cost margins of some state commercial banks shrink over time. Furthermore, consumers benefit from low prices set by state commercial banks because of government interventions and fixed costs of switching banks faced by consumers. Revenues of state commercial banks have risen in the face of falling price-cost margins as a result of high GDP growth and government policies which favor state commercial banks over other financial institutions. The empirical results show that more branch locations and higher quality employees are valued by consumers; as such, recent branch consolidations and layoffs impose welfare costs on consumers. In particular, welfare effects are unevenly distributed and losses are skewed towards inland provinces.

Keywords: Banking reform, Banks in China, Demand Estimation, Market Structure

JEL Classification: G21, L11

Suggested Citation

Ho, Chun-Yu, Market Structure, Welfare and Banking Reform in China (February 2008). Available at SSRN: https://ssrn.com/abstract=1102873 or http://dx.doi.org/10.2139/ssrn.1102873

Chun-Yu Ho (Contact Author)

State University of New York (SUNY) - Department of Economics ( email )

1400 Washington Ave
Albany, NY 12222
United States

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