The Political Economy of Branching Restrictions and Deposit Insurance: a Model of Monopolistic Competition Among Small and Large Banks

41 Pages Posted: 13 Jun 2000  

Nicholas Economides

New York University - Leonard N. Stern School of Business - Department of Economics

R. Glenn Hubbard

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Darius Palia

Rutgers Business School; Center for Contract & Economic Organization

Date Written: August 1995

Abstract

This paper suggests that the introduction of bank branching restrictions and federal deposit insurance in the United States likely was motivated by political considerations. Specifically, we argue that these restrictions were instituted for the benefit of the small, unit banks that were unable to compete effectively with large, multi- unit banks. We analyze this 'political hypothesis' in two steps. First, we use a model of monopolistic competition between small and large banks to examine gains to the former group from the introduction of branching restrictions and government-sponsored deposit insurance. We then find strong evidence for the political hypothesis by examining the voting record of Congress.

Suggested Citation

Economides, Nicholas and Hubbard, R. Glenn and Palia, Darius, The Political Economy of Branching Restrictions and Deposit Insurance: a Model of Monopolistic Competition Among Small and Large Banks (August 1995). NBER Working Paper No. w5210. Available at SSRN: https://ssrn.com/abstract=225274

Nicholas Economides (Contact Author)

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

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HOME PAGE: http://www.stern.nyu.edu/networks/

Robert Glenn Hubbard

Columbia Business School - Finance and Economics ( email )

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New York, NY 10027
United States

HOME PAGE: http://www.gsb.columbia.edu/faculty/ghubbard

National Bureau of Economic Research (NBER)

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Darius Palia

Rutgers Business School ( email )

111 Washington Street
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Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Center for Contract & Economic Organization ( email )

435 W 116th St.
New York, NY 10027
United States

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