Imperfect capital markets, income distribution and the choice of external finance: A financial equilibrium approach

We develop and analyze a simple financial equilibrium model with capital market imperfections. We allow agents to choose on which side of the market they participate. We also allow for the co-existence of bank loans and direct finance. Our findings suggest that financial development depends on both the initial level of aggregate wealth and its distribution among the agents in the economy. We also identify a number of new issues that can potentially be addressed by following our financial equilibrium approach.