Banking Sector Rent-Seeking and Top Income in OECD Countries

This study investigates the association between the banking sector’s rent-seeking and top income in OECD economies. It explains the response of the top income measure to rent-seeking using an impulse response function and describes the variation of the top income by variance decomposition analysis. Employing a panel vector autoregression model, we find that the top 1 percent income share increases in response to a rent-seeking shock. It implies that rent-seeking, measured as an excess profit and lower competition, has a significantly positive effect on the top income measure. Evidence shows that an excess profit is positively associated with monopolistic competition and asset concentration in the banking industry. Competition reduces the concentration of income at the top percentile in advanced economies. The empirical findings suggest that an accumulation of income by a small group is detrimental to overall growth.