Switching Cost and the Deposit Demand in China

This paper develops and estimates a dynamic model of consumer demand for deposits, in which banks provide di¤erentiated products, and product characteristics evolve over time. Consumers choose their banks based on the utility received from using their services, and incur a …xed cost when they switch banks. Consequently, consumer choices include which bank to use and when to switch. Utilizing the dynamic structural model, I analyze the impact of forward looking behavior on understanding consumer preferences. The main …nding is that switching costs have signi…cant impacts on consumer’s choice of deposit institutions. Consumers adjust their bank choices gradually when there are changes in bank attributes. The …xed cost incurred to switch banks leads the static demand model understating the price elasticity of service fees and overstating the willingness to pay of consumers on product characteristics. Keywords: Banks in China, Demand Estimation, Switching Cost. JEL classi…cations: G21, L11 I am grateful to Marc Rysman for guidance and support. I have bene…ted from conversations with Victor Aguirregabiria, Otto Toivanen and seminar participants at Bank of Finland (BOFIT), the conference of the Chinese Economic Association in North America in San Francisco 2009, Fudan University and Helsinki Center of Economic Research (HECER), Shanghai Jiaotong University and Shanghai University of Finance and Economics. All remaining errors are my own. ySchool of Economics, Georgia Institute of Technology, Atlanta, GA 30332, USA; E-mail: chunyu:ho@econ:gatech:edu; Webpage: http : ==www :prism:gatech:edu=~cho33 .