Economics

Hendrik Hakenes, Isabel Schnabel

The Threat of Capital Drain: A Rationale for Regional Public Banks?

Volume 166 () / Issue 4, pp. 662-689 (28)

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This paper yields a rationale for why subsidized public banks may increase regional welfare in a financially integrated economy. We present a model with credit rationing and heterogeneous regions in which public banks prevent a capital drain from poorer to richer regions by subsidizing local depositors, for example, through public guarantees. Under some conditions, cooperative banks can perform the same function without any subsidies; however, they may be crowded out by public banks. We also discuss the influence of the political structure on the emergence of public banks in simple political-economy settings and the role of interregional mobility.
Authors/Editors

Hendrik Hakenes No current data available.

Isabel Schnabel No current data available.