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Bank competition, real investments, and welfare

Oz Shy () and Rune Stenbacka ()
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Rune Stenbacka: Hanken School of Economics

Journal of Economics, 2019, vol. 127, issue 1, 73-90

Abstract: Abstract We construct an overlapping generations growth model, where young consumers choose how to allocate resources among real investment (deposits), acquisition of bank ownership, and young-age consumption. At old age, consumers sell bank ownership and collect their bank deposits to support consumption. The model shows that an increase in banks’ market power stimulates bank profit and bank value, thereby raising the resources required for young consumers to acquire bank ownership. This causes a crowding-out effect on real investment, the magnitude of which is amplified with higher endowment growth rate and real investment return. Finally, we conduct a welfare analysis of the investment crowding-out effect.

Keywords: Investment crowding-out; Size of the banking sector; Deposit market competition; Economic growth (search for similar items in EconPapers)
JEL-codes: G21 O41 (search for similar items in EconPapers)
Date: 2019
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