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2015 Documento de Trabajo #321

On the welfare cost of bank concentration

We build a model of bank concentration. Banks and entrepreneurs meet in a credit market characterized by search frictions and negotiate repayment rates à la Nash. Banks are large in the sense that they allocate credit to more than one entrepreneur through branches and there is bank heterogeneity in terms of their cost structure. Banks have incentives to overlend, generating a scale inefficiency and overconcentration of banks. We find that this friction also generates too much concentration on the goods market, lowering aggregate output and welfare. We calibrate the model with data on the distribution of branches across banks in the US and available estimates on X-efficiency in the banking sector to assess the quantitative importance of this effect.  We find that aggregate output would increase by 2.4% had the scale inefficiency been absent, while loan rates would decrease by 1.2%.

JEL codes: E44; G21; G28.

Sofía Bauducco
Alexandre Janiak

Keywords: Bank concentration; Bargaining; Search; Scale inefficiency; X-efficiency.