The John M. Olin Center

Paper Abstract

Untitled Document

72. Jeffery Y. Zhang, The Rise of Market Concentration and Rent Seeking in the Financial Sector, 04/2017.

Abstract: This article investigates the impact of consolidation within the banking sector on rent seeking. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 removed all remaining geographical barriers to interstate bank expansion in the United States. This resulted in a tidal wave of interstate mega-mergers in the banking industry, which led to greater market power for large banks across the country. The analysis contributes to the scholarship by showing that the increased market concentration skewed the wage distribution of employees in the financial sector, as large banks were able to capture economic rents. Specifically, the increase in income at the higher end of the wage distribution was not justified by a proportional increase in productivity, either through greater economies of scale or higher human capital. Rather, part of the increase is explained by a decline in bank charter values and a rise in risk taking.