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Rational herding and the spatial clustering of bank branches: an empirical analysis

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  • Angela E. Chang
  • Shubham Chaudhuri
  • Jith Jayaratne

Abstract

Bank branches in New York City tend to be spatially clustered. For instance, of the 221 branches that were opened in New York City between July, 1990 and June, 1995, 181 (or 82 percent) were opened in census tracts that already had at least one other branch. A number of recent theoretical papers have highlighted the possibility of rational herding in various arenas of economic activity. This paper explores empirically whether the apparent clustering of bank branches can be at least partially attributed to rational herding by banks. We find that even after controlling for the expected profitability of operating a branch in an area, branch openings follow other, existing branches. Moreover, such bandwagon behavior appears to reduce branch profits. These findings, combined, suggest that herd behavior may be a factor in the branch location decisions of banks.

Suggested Citation

  • Angela E. Chang & Shubham Chaudhuri & Jith Jayaratne, 1997. "Rational herding and the spatial clustering of bank branches: an empirical analysis," Research Paper 9724, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednrp:9724
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    Cited by:

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    3. Lisa Mohanty & Gary Dymski, 1999. "Credit and Banking Structure: Asian and African-American Experience in Los Angeles," American Economic Review, American Economic Association, vol. 89(2), pages 362-366, May.
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    5. Shusen Qi & Ralph De Haas & Steven Ongena & Stefan Straetmans & Tamas Vadasz, 2017. "Move a Little Closer? Information Sharing and the Spatial Clustering of Bank Branches," Swiss Finance Institute Research Paper Series 17-74, Swiss Finance Institute, revised Jun 2023.
    6. Dorothea Schafer & Boriss Siliverstovs & Eva Terberger, 2010. "Banking competition, good or bad? The case of promoting micro and small enterprise finance in Kazakhstan," Applied Economics, Taylor & Francis Journals, vol. 42(6), pages 701-716.
    7. Jackowicz, Krzysztof & Kozłowski, Łukasz & Wnuczak, Paweł, 2021. "Which local markets do banks desert first? evidence from poland," Finance Research Letters, Elsevier, vol. 38(C).
    8. Xue Ning & Yang Lu & Dobin Yim & Jiban Khuntia, 2023. "Factors Affecting the Usage Intention of Environmental Sustainability Management Tools: Empirical Analysis of Adoption of Greenhouse Gas Protocol Tools by Firms in Two Countries," Sustainability, MDPI, vol. 15(3), pages 1-21, February.

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