How Banking Competition Affects Economic Growth and Welfare

46 Pages Posted: 17 Sep 2022 Last revised: 13 Jan 2023

See all articles by Tom Rauber

Tom Rauber

University of Kaiserslautern

Paul Ritschel

University of Kaiserslautern

Date Written: January 13, 2023

Abstract

Competition is commonly praised by economists: it causes low prices, efficient outcomes, and high levels of welfare. This article challenges this view by exploring the effect of interbank competition on economic growth and welfare in a dynamic model with endogenous capital accumulation. It demonstrates that monopolistic banking outperforms its competitive counterpart in terms of both growth and welfare if the production technology is capital-intensive, whereas competition is favorable for labor-intensive technologies. The model can thereby explain an empirical puzzle. Irrespective of competition, banks increase an economy's level of long-run growth by encouraging investments of private households through the provision of risk sharing. A banking monopoly can induce endogenous growth cycles if profits are redistributed to agents as dividends.

Keywords: Financial Intermediation, Economic Growth, Welfare, Endogenous Fluctuations, OLG Models, Deposit Contracts, Risk Sharing

JEL Classification: D53, E32, E44, G21, O41

Suggested Citation

Rauber, Tom and Ritschel, Paul, How Banking Competition Affects Economic Growth and Welfare (January 13, 2023). Available at SSRN: https://ssrn.com/abstract=4209066 or http://dx.doi.org/10.2139/ssrn.4209066

Tom Rauber

University of Kaiserslautern ( email )

Paul-Ehrlich-Straße 14
Kaiserslautern, D-67663
Germany
+49 (631) 205 4806 (Phone)

HOME PAGE: http://https://vwl-mikro.wiwi.uni-kl.de/team/tom-rauber

Paul Ritschel (Contact Author)

University of Kaiserslautern ( email )

Paul-Ehrlich-Straße 14
Kaiserslautern, D-67663
Germany

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