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

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Research Papers

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

August 1997 Number 9724

Authors: Angela Chang, Shubham Chaudhuri, and Jith Jayaratne

Bank branches in New York City tend to be spatially clustered. For instance, of the 221 branches that were opened in New York City 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 bandwagon 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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