ON NETWORK COMPETITION AND THE SOLOW PARADOX: EVIDENCE FROM US BANKS

Sushanta K. Mallick () and Shirley J. Ho

Manchester School, 2008, vol. 76, issue s1, pages 37-57

Abstract: In this paper we develop a model to examine the effect of information technology (IT) in the banking industry. IT can reduce operational cost and create network externality. Empirical studies, however, have shown inconsistency, the so-called Solow paradox, which we explain by stressing the heterogeneity in banking services. In a differentiated model, we characterize the conditions to identify these two effects and explain how the two seemingly positive effects turn negative. Using a panel data set of 68 US banks over 1986-2005, our results show that the profitability effect of IT spending is negative, reflecting a negative network competition effect in the banking industry. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd and The University of Manchester.

Date: 2008

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