Banking competition and capital dependence of the production sector: Growth and welfare implications

This article explores how competition among banks affects economic growth and welfare in an overlapping-generations model with rational expectations. We show that monopolistic banking can outperform its competitive counterpart in terms of both growth and welfare if the production sector is capital-intensive. In contrast, competition is beneficial if production is labor-intensive. The capital dependence of the production sector determines the relative importance of agents' saving incentives and banks' intermediation margins for capital accumulation. The theory of the second best explains the welfare-enhancing effect of a monopoly since capital accumulation is generally inefficient. We link these findings to empirical evidence.