The Organizational Economics of Banking: Evidence from Ethiopia

ABSTRACT:

Financial institutions have a critical role in promoting poverty reduction, investment, and welfare. As a matter of fact, the availability of firm credit is crucial for the entry, growth, and internationalization of firms. The aim of the three projects of this proposal is to shed light on a new mechanism through which banking systems can promote the quantity and quality of credit to the economy: by investing in their management and branch organization. The key innovation of our project is a new measure of financial development: the intensive margin. While traditionally economists have relied on branch expansion to measure the outreach to new geographic areas (the extensive margin), in this project, we focus on the ability of bank officers in local branches to reach out to the most innovative entrepreneurs and the most valuable depositors. Building on the experience of Bloom and Van Reenen (2007, 2010), we adopt an in-depth survey methodology and construct a robust index of management practices to inquire into and understand the differences in management practices across bank branches within a country. The focus of the empirical analysis is Ethiopia, as we deem to represent the ideal environment for this study: indeed, given the severe infrastructure constraints, Ethiopian banks invest significantly in management practices. We have already built a pilot version of the World Management Survey for 2015 and this survey was administered to the population of bank branches in Ethiopia, recording a 59% response rate. This grant would allow us to extent this pilot by allowing us to hire new assistants and associates, and reach the universe of local bank branches, measure their management and organizational variables.

This research proposal presents 3 projects that aim at enhancing the investigation into the management practice in the banking sector.

In particular, we will answer the following research questions:

1. How does technology change the delegation between parties? We will investigate this by studying how bank headquarters and branches react to the arrival of high-speed internet.

2. How does the adoption of structured managerial practices affect banks’ organizational design and performance? We will study how the adoption of good managerial practices affects the span of control for managers in high layers of banks. We will also analyze the impact of this organizational choice on banks’ performance.

Other Research Units: 

• Luca Picariello, Università degli Studi di Napoli Federico II