Banking competition and welfare
Marcella Lucchetta ()
Annals of Finance, 2017, vol. 13, issue 1, 31-53
Abstract We develop a simple general equilibrium model in which investment in a risky technology is subject to moral hazard and banks can extract market power rents. We show that more bank competition results in lower economy-wide risk, higher social welfare, lower bank capital ratios, more efficient production plans and Pareto-ranked real allocations. Perfect competition supports a second best allocation and optimal levels of bank risk and capitalization. These results are at variance with those obtained by a large literature that has studied a similar environment in partial equilibrium, they are empirically relevant, and carry significant implications for policy guidance.
Keywords: Banking competition; General equilibrium; Welfare (search for similar items in EconPapers)
JEL-codes: G1 G01 G2 D53 D6 (search for similar items in EconPapers)
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