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Margins Of International Banking: Is There A Productivity Pecking Order In Banking, Too?

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Executive Summary

Modern trade theory emphasizes firm-level productivity differentials to explain the cross-border activities of non-financial firms. This paper tests whether a productivity pecking order also determines international banking activities. Using a novel dataset that contains all German banks' international activities, the authors estimate the ordered probability of a presence abroad (extensive margin) and the volume of international assets (intensive margin). Methodologically, they enrich the conventional Heckman selection model to account for the self-selection of banks into different modes of foreign activities using an ordered probity.

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