The Effects of Bank Market Structure and Organizational Form on Entrepreneurial Incentives

Abstract

Cooperative financial institutions arose in response to the perceived failure of the conventional banking system to serve marginal communities. Such institutions now enjoy a widespread and growing presence in banking markets across the world. Yet, the costs and benefits of this organizational form remain a theoretical puzzle. We show that the cooperative organizational form overcomes a classic friction associated with bank market power but that whether overcoming this friction is welfare enhancing or not depends critically on the structure of the local economy. We also show how “redlining” may arise in equilibrium. These results lead to a rich set of implications for empirical and policy research.