ABSTRACT
In this chapter, a model of the individual banking firm is developed that predicts bank behavior under the assumption of profit maximization. The objective in developing this model is to be able to analyze bank behavior, and so answer questions that were raised in the preceding chapters. One important question, for example, is whether a bank’s behavior was affected by the bank’s capital position. Another issue is to see how the demand for loans affected a bank’s behavior. The impact of banking regulation can also be explored with the model. The estimations of the model using data for California’s banks between 1878 and 1908 are presented in Chapter 5 below.
