Abstract
This paper 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. The latter can at least partly be explained by complementarities between credit products offered by different types of banks in Brazil. Our counterfactual study shows that privatization substantially reduces the number of banks. More than half of the markets in our sample would end up without any bank branch if banks were privatized. The government can mitigate the effects of privatization by providing subsidies to private banks. Our model predicts subsidy policies that reduce operating costs are always more cost-effective than entry costs for isolated markets in Brazil.