Technology Adoption, Market Structure, and the Cost of Bank Intermediation

61 Pages Posted: 24 Mar 2021 Last revised: 9 Dec 2021

See all articles by Gianni De Nicolo

Gianni De Nicolo

Johns Hopkins University - Carey Business School; CESifo (Center for Economic Studies and Ifo Institute)

Andrea Presbitero

Johns Hopkins University

Alessandro Rebucci

Johns Hopkins University - Carey Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Gang Zhang

University of Virginia

Date Written: March 23, 2021

Abstract

This paper studies the high and persistent U.S. cost of financial intermediation (CFI) documented by Philippon (2015) and its inverted U-shape behavior since the mid-1960s. We build a novel model of endogenous growth and bank intermediation and introduce imperfect bank competition, bank IT adoption and bank entry, and an occupational choice that determines the relative size of the labor force and the economy's average level of managerial ability. The interplay between verification costs, market structure, and occupational choice delivers implications for the CFI which are qualitatively consistent with the stylized facts of the U.S. economy. We find that the banking sector structure is the main determinant of the long-run level of the CFI. We also show that the U.S. productivity growth slowdown from the mid-1960s to the mid-1980s is a major driver of the simultaneous increase in the CFI and the number of banks during this period and their subsequent decline.

Keywords: Banking, Cost of Finance, Financial Intermediation, Imperfect Competition, Productivity slowdown, Technology Adoption

JEL Classification: E44, G21, G38, O33

Suggested Citation

De Nicolo, Gianni and Presbitero, Andrea and Rebucci, Alessandro and Zhang, Gang, Technology Adoption, Market Structure, and the Cost of Bank Intermediation (March 23, 2021). Johns Hopkins Carey Business School Research Paper No. 21-12, Available at SSRN: https://ssrn.com/abstract=3810796 or http://dx.doi.org/10.2139/ssrn.3810796

Gianni De Nicolo

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
(410) 234-4507 (Phone)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
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Andrea Presbitero (Contact Author)

Johns Hopkins University ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

HOME PAGE: http://https://sites.google.com/site/presbitero/

Alessandro Rebucci

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu/faculty-research/faculty-directory/alessandro-rebucci-phd

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Gang Zhang

University of Virginia

1400 University Ave
Charlottesville, VA 22903
United States

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