IT Use, Productivity, and Market Power in Banking

Posted: 13 Nov 2011 Last revised: 17 Sep 2014

See all articles by Felix Noth

Felix Noth

Otto-von-Guericke-Universität Magdeburg; Halle Institute for Economic Research

Michael Koetter

Halle Institute for Economic Research

Date Written: December 1, 2013

Abstract

Information management is a core process in banking that can resolve information asymmetries and thereby help to mitigate competitive pressure. We test if the use of information technology (IT) contributes to bank output, and how IT-augmented bank productivity relates to differences in market power. Detailed bank-level information on the use of IT reveals a substantial upward bias in bank productivity estimates when ignoring banks’ IT expenditures. IT-augmented bank productivity correlates positively with Lerner markups. A mere increase in IT expenditures, however, reduces markups. Results hold across a range of bank output definitions and productivity estimation methods.

Keywords: Information technology, Productivity, Competition, Lerner index, Banking

JEL Classification: G21, L1

Suggested Citation

Noth, Felix and Noth, Felix and Koetter, Michael, IT Use, Productivity, and Market Power in Banking (December 1, 2013). Journal of Financial Stability, Volume 9, Issue 4, December 2013, Pages 695-704, Available at SSRN: https://ssrn.com/abstract=1958612 or http://dx.doi.org/10.2139/ssrn.1958612

Felix Noth (Contact Author)

Otto-von-Guericke-Universität Magdeburg ( email )

Universitätspl. 2
PSF 4120
Magdeburg, D-39106
Germany

Halle Institute for Economic Research

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/asp/person.asp?fnh&Lang=e&Abteilung=fin

Michael Koetter

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

HOME PAGE: http://www.iwh-halle.de/en/about-the-iwh/people/detail/michael-koetter/

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