Rand Journal of Economics V 49, N 4, P 936-963, 2018

Fábio Miessi Sanches, Daniel Silva Junior, Sorawoot Srisuma.

This article examines the effects of bank privatization on the number of bank branches operating in small isolated markets in Brazil. We estimate a dynamic game played between Brazilian public and private banks. We find private banks compete with each other as expected. We also find public banks generate positive spillovers for private banks. Our counterfactual study shows that privatization substantially reduces the number of banks. The government can mitigate the effects of privatization by providing subsidies to private banks. Our model predicts subsidy policies that reduce operating costs are more cost‐effective than entry costs for isolated markets in Brazil.