Rational Herding and The Spatial Clustering of Bank Branches: An Empirical Analysis

Abstract

Bank Branches in NYC tend to be spatial clustered. For instance, of the 221 branches that were opened in NYC 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 band wagon behavior appears to reduce branch profits. These findings, combined, suggest that herd behavior may be a factor in the branch location decisions of banks.

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