Assessment of the Deadweight Loss Arising from the Imperfect Competition in the Banking Market

Abstract

Financial market failures lead to the deadweight (welfare) loss for the society. Assessment of the deadweight loss started with so called the Harberger Triangles, where Harberger offered a clear and persuasive derivation of the triangle method of analyzing the deadweight loss and applied the method to estimate deadweight losses due to income taxes in the United States. Hertog further put the deadweight loss into the model with government intervention to assess the optimal level of welfare loss control. This concept is central in regulatory economics. Harberger’s approach is based on the deviation of market equilibrium measured in terms of price and quantity. When analyzing the imperfect competition as one of the market failures authors have identified in the literature variables for “price” and “quantity”. Research presents the approach how to calculate the deadweight loss arising from the imperfect competition using the following variables: “price” – interest rates (loans), “quantity” – exposure of loans on banks’ balance sheets. Outcome of the research is the integral for assessment of the deadweight loss arising from the imperfect competition. Deadweight loss calculations for selected countries show results corresponding to the expectation to be lower than 12% - maximum value is 4,6% for Latvia, which experienced the most significant increase in the banking market concentration from the sample. Research methods used: literature analysis, regression analysis, mathematical analysis tools (integrals).

Keywords

• banking market
• deadweight loss
• imperfect competition
• market regulation
• model construction
• regulatory economics