Article ID Journal Published Year Pages File Type
966821 Journal of Monetary Economics 2006 22 Pages PDF
Abstract

We study bank-based and market-based financial systems in an endogenous growth model. Lending to firms is fraught with moral hazard as owner-managers may reduce investment profitability to enjoy private benefits. Bank monitoring partially resolves the agency problem, while market-finance is more ‘hands-off’. A bank-based or market-based system emerges from firm-financing choices. Neither system is unequivocally better for growth, which crucially depends on the efficiency of financial and legal institutions. But a bank-based system outperforms a market-based one along other dimensions. Investment and per capita income are higher, and income inequality lower, under a bank-based system. Bank-based systems are also more conducive for broad-based industrialization.

Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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