State banks, institutions and financial development
Svetlana Andrianova
Panicos Demetriades
Anja Shortland
2134/367
https://repository.lboro.ac.uk/articles/preprint/State_banks_institutions_and_financial_development/9492665
We present a locational model of banking with two types of private
banks, honest and opportunistic, and a state bank that is assumed to
be less efficient. Opportunistic banks choose whether to honor their contracts
with depositors depending on the probability of contract enforcement. We derive
three types of equilibria, which depend on institutional quality: a “low”
equilibrium in which private banks choose not to enter the market, a “high”
equilibrium in which depositors place all their savings with private banks and
an “intermediate” equilibrium in which state banks and private banks co-exist.
In the intermediate equilibrium, the share of state banks depends inversely on
institutional quality and positively on the proportion of opportunistic banks.
We also show that when enforcement of deposit contracts is subject to a resource
constraint, multiple equilibria can exist, and that depositors’ perception
of whether opportunistic behavior is present determines the type of equilibrium
which prevails. We test our theoretical predictions using cross-country
data. We find that both the quality of prudential regulation (or rule of law)
and disclosure are inversely related to the share of state banks, consistent with
our theoretical model. We also find that the incidence of banking crisis, which
proxies perceived institutional quality, is positively related to the share of state
banks.
2005-08-12 16:15:38
regulation
opportunistic banks
institutional quality
Economics not elsewhere classified