Bank Competition, Real Investments, and Welfare
23 Pages Posted: 4 Aug 2016 Last revised: 22 Jul 2018
Date Written: July 12, 2018
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: Suggested Citation