The implications of market structure and bank efficiency on social welfare: the case of the Saudi Arabian banking system

Abdullah Almounsor and Sami Mensi

Middle East Development Journal, 2016, vol. 8, issue 2, 329-357

Abstract: This paper estimates the social costs of market power in the Saudi Arabia banking system over the period 2001–2012. It also tests the so-called Quiet Life Hypothesis, which postulates a negative effect of market power on bank management efficiency (X-efficiency), cost-efficiency and profit-efficiency. The Lerner index for all Saudi banks averaged 0.66, indicating that the Saudi Arabian Banking sector is far from being competitive. Using the Harberger’s triangle methodology, the social welfare cost attributable to market power for the whole period is estimated at 0.82% of GDP. However, the research found that market power in the Saudi banking sector is a significant determinant of bank inefficiency, thereby supporting the Quiet Life Hypothesis. The paper suggests important policy implications to improve banking competition and reduce welfare losses associated with market power.

Date: 2016
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DOI: 10.1080/17938120.2016.1226467

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