Working Paper: CEPR ID: DP18171
Authors: Tamas Vadasz; John Thanassoulis
Abstract: We build a two-stage model of competition in the banking market to study the combined price of accounts and credit. We include naivety, adverse selection, and imperfect screening. We show that credit market profits are not competed away in the (primary) market for accounts. We establish an Information Penalty: the total cost of banking to consumers is V -shaped in the quality of screening in free banking markets. This implies better AI or use of Big Data first lowers then raises the cost of banking in countries similar to the US/UK. While in paid banking markets we establish a Sophistication Penalty: the cost of banking is ∩-shaped in customer sophistication. This implies improving financial literacy can raise banking costs in countries similar to France/Germany.
Keywords: information; naivety; competition
JEL Codes: G10; G21; G40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Quality of screening (L15) | Total banking costs (G21) |
| Consumer sophistication (D18) | Banking costs (G21) |
| Naivety of clients (D83) | Pricing strategies in the credit market (D49) |