Bank Technology Adoption and Firm Productivity

Abstract

We develop and estimate a model of endogenous growth in productivity and bank efficiency, where banks adopt technology embedded in capital goods produced by entrepreneurs, and agents choose whether to become workers or capital-good-producing entrepreneurs. In this framework, bank efficiency influences productivity by affecting agents' occupational choices, while productivity, in turn, affects bank efficiency through the relative price of capital goods. We find that increasing technology adoption in the banking system to the level in the top half of the distribution in the data accelerates the economy's long-term growth from 2% to 2.19%. We also find that empirical evidence based on U.S. bank, MSA, and state level data is consistent with the critical mechanisms of our model.

Keywords: Bank efficiency, Cost of Intermediation, Growth, Firm Size Distribution, Technology Adoption, Productivity.

JEL Classification: E44