Thursday, January 29, 2015
Alfredo Martin Oliver (Universitat de les Illes Balears), Sonia Ruano Pardo (Banco de Espana), and Vicente Salas Fumas (Universidad de Zaragoza) analyze Productivity and welfare: an application to the Spanish banking industry.
ABSTRACT: This paper examines the links between productivity and social welfare, with an application to the banking industry. It models spatial price competition between bank branches jointly with banks’ decisions on the opening or closing of branches based on profit expectations. The model predicts that more productive banks set lower (higher) interest rates on loans (deposits) and increase their market share through both higher demand per branch and a larger network of branches. Specifically, the paper i) uses a new measure of bank productivity; ii) provides a productivity differences-based explanation of the distance between bank branches and bank customers; and iii) shows how the intensity of market competition may be unaffected when the number of banks decreases, provided that banks continue expanding their branch network. The empirical implementation of the model uses Spanish banks over the period 1993-2007 and it confirms the theoretical predictions of the paper