Divestment and bank competition

Bibhas Saha, Rudra Sensarma

Research output: Contribution to journalArticlepeer-review

14 Citations (Scopus)


We determine optimal divestment (partial privatization) and entry in banking in the context of a mixed oligopoly. When banks compete in deposits, greater entry is associated with higher divestment. However, social welfare improves with entry only when the private entrants are more efficient than the public bank. Further, when banks compete in interest rates with differentiated products, the public bank’s behavior resembles that of a price leader and it earns less profit than the private bank, if government holding in the public bank is sufficiently high. Competition becomes excessive in this case, and social welfare maximization requires greater divestment.
Original languageEnglish
Pages (from-to)223-247
Number of pages25
JournalJournal of Economics
Issue number3
Publication statusPublished - 2004

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