Concentration in the Banking Industry and Economic Growth∗

We present an OLG endogenous growth model in which a reduction in the level of concentration in the banking industry exterts two opposite effects on economic growth. On the one hand, it induces economies of specialisation which enhances intermediation efficiency and thereby eco-nomic growth. On the other hand, it results in duplication of Þxed costs which is detrimental for efficiency and growth. The trade off between the two opposing effects is ambiguous and can vary along with the dynamic process of Þnancial and economic development. Using cross country in-dustry data we Þnd that banking concentration is negatively associated with industrial growth only in low income countries while there is no such asssociation in high income countries. These empirical Þndings support the models prediction that there exist a different relationship between banking concentration and growth depending on the level of economic development