Banking on Technology: Bank Technology Adoption and Its Effects

We develop and estimate a new model of endogenous growth in bank efficiency and firm productivity in which banks adopt technology embedded in capital goods produced by entrepreneurs, and agents choose whether to become workers or capital-good-producing entrepreneurs. In this framework, bank efficiency influences firm productivity by affecting agents’ occupational choices, while firm productivity affects bank efficiency through the relative price of capital goods. We find that increasing technology adoption in the banking system to the level in the top half of the distribu-tion in the data accelerates the economy’s long-term growth from 2% to 2.17%, and two-thirds of this gain stems from the amplification mechanism proposed. We also report empirical evidence based on U.S. bank, metropolitan, and state-level data that is in line with the critical comparative statics of the model.