Productivity and Welfare: An Application to the Spanish Banking Industry

43 Pages Posted: 29 Oct 2014

See all articles by Alfredo Martín‐Oliver

Alfredo Martín‐Oliver

University of the Balearic Islands

Sonia Ruano

Banco de España

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization

Date Written: October 28, 2014

Abstract

This paper examines the links between productivity and social welfare, with an application to the banking industry. It models spatial price competition between bank branches jointly with banks’ decisions on the opening or closing of branches based on profit expectations. The model predicts that more productive banks set lower (higher) interest rates on loans (deposits) and increase their market share through both higher demand per branch and a larger network of branches. Specifically, the paper i) uses a new measure of bank productivity; ii) provides a productivity differences-based explanation of the distance between bank branches and bank customers; and iii) shows how the intensity of market competition may be unaffected when the number of banks decreases, provided that banks continue expanding their branch network. The empirical implementation of the model uses Spanish banks over the period 1993-2007 and it confirms the theoretical predictions of the paper.

Keywords: banking spatial competition, bank branch productivity, interest rates, branch dynamics, bank economic profits

JEL Classification: E43, G21, L11, O30, R32

Suggested Citation

Martin-Oliver, Alfredo and Ruano, Sonia and Salas-Fumás, Vicente, Productivity and Welfare: An Application to the Spanish Banking Industry (October 28, 2014). Banco de Espana Working Paper No. 1426, Available at SSRN: https://ssrn.com/abstract=2515740 or http://dx.doi.org/10.2139/ssrn.2515740

Alfredo Martin-Oliver (Contact Author)

University of the Balearic Islands ( email )

Crtra. Valldemossa, km 7.5
Ed. Jovellanos
Palma de Mallorca, Illles Balears 07122
Spain

Sonia Ruano

Banco de España ( email )

Madrid 28014
Spain

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization ( email )

Dr. Cerrada 1
5005 Zaragoza
Spain
+34 976 761803 (Phone)

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