Bank Competition, Real Investments, and Welfare

23 Pages Posted: 4 Aug 2016 Last revised: 22 Jul 2018

Oz Shy

Independent

Rune Stenbacka

Hanken School of Economics

Date Written: July 12, 2018

Abstract

We construct an overlapping generations growth model, where young consumers choose how to allocate resources among real investment (deposits), acquisition of bank ownership, and young-age consumption. At old age, consumers sell bank ownership and collect their bank deposits to support consumption. The model shows that an increase in banks' market power stimulates bank profit and bank value, thereby raising the resources required for young consumers to acquire bank ownership. This causes a crowding-out effect on real investment, the magnitude of which is amplified with higher endowment growth rate and real investment return. Finally, we conduct a welfare analysis of the investment crowding-out effect.

Keywords: Investment crowding-out, size of the banking sector, deposit market competition, economic growth

JEL Classification: G21, O41

Suggested Citation

Shy, Oz and Stenbacka, Rune, Bank Competition, Real Investments, and Welfare (July 12, 2018). Available at SSRN: https://ssrn.com/abstract=2818430 or http://dx.doi.org/10.2139/ssrn.2818430

Oz Shy (Contact Author)

Independent ( email )

No Address Available

Rune Stenbacka

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland
+35 89 4313 3433 (Phone)
+35 89 4313 3382 (Fax)

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