The Impact of Local Knowledge on Banking
41 Pages Posted: 3 Jul 2010 Last revised: 23 Apr 2014
Date Written: April 22, 2014
We use firm-level data to study how local knowledge impacts the wage and profitability of commercial banks. Using a novel regulatory and competitive environment as a natural experiment, we find that restrictions on the mobility of local knowledge negatively impact the incidence of new bank charters. Also consistent with expected theory, we also find no impact on banks formed through mergers or acquisition where the acquiring bank can simply purchase the local knowledge available.
We also find that restrictions on the mobility of local knowledge decrease labor expenses. This supports the hypothesis that such mobility restrictions enable employers to extract rents from workers who lack bargaining power arising from a potential job change to a local rival. We also find that increases in labor restrictions are positively correlated with profitability, benefiting established banks because it restricts competitive with potential new banks that could potentially exploit local knowledge more effectively.
Keywords: labor mobility, local knowledge, relationship banking, covenants not to compete, banks, banking regulation
JEL Classification: J61, K31, G21
Suggested Citation: Suggested Citation