Expansion of Spanish Banks: Distance Costs and Proximity Gains
A striking empirical feature of the expansion of financial institutions in Spain is the degree to which some banks and cajas expanded concentrically around their home provinces, suggesting that the cost to enter a new province decreases in the distance from a bank’s original branches. This document outlines an approach to estimating the fixed costs associated with bank expansion via a method of simulated maximum likelihood similar to the procedure suggested by Bajari, Benkard, and Levin (Econometrica, Sep 2007, 1331-1370). A first look at the data suggests that these expansion costs may be substantially heterogeneous across banks, causing some to expand only to neighboring provinces while allowing others to jump across Spain. Understanding these costs, and origins of their heterogeneity, is thus an important component to understanding the barriers to free entry in the financial system and hence the degree of market power that financial institutions may enjoy.
This paper was presented at the Financial Systems, Industrial Organization, and Economic Development Workshop in April of 2012. The corresponding presentation is also available.