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Financial Globalization and the Governance of Domestic Financial Intermediaries

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  • Thierry Tressel
  • Thierry Verdier

Abstract

We model an economy in which domestic banks and firms face incentive constraints, as in Holmstrom and Tirole (1997). Firms borrow from banks and uninformed investors, and can collude with banks to reduce the intensity of monitoring. We study the general equilibrium effects of capital flows (portfolio investments and loans, FDI) on the governance of domestic banks. We find that liberalization of capital flows may deteriorate the governance of the domestic financial system by increasing firms'' incentives to collude with banks, with negative effects on productivity. We also show that systemic bailout guarantees increase the risks of collusion.

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File URL: http://hdl.handle.net/10.1111/j.1365-2966.2010.01003.x
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Bibliographic Info

Article provided by European Economic Association in its journal Journal of the European Economic Association.

Volume (Year): 9 (2011)
Issue (Month): 1 (02)
Pages: 130-175

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Handle: RePEc:bla:jeurec:v:9:y:2011:i:1:p:130-175

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Citations

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Cited by:
  1. Kukenova, Madina, 2011. "Financial liberalization and allocative dfficiency of capital," Policy Research Working Paper Series 5670, The World Bank.
  2. Raghuram Rajan, 2008. "Global Imbalances or why are the Poor Financing the Rich?," De Economist, Springer, vol. 156(1), pages 3-24, March.
  3. Kunieda, Takuma & Okada, Keisuke & Shibata, Akihisa, 2011. "Finance and Inequality: How Does Globalization Change Their Relationship?," MPRA Paper 35358, University Library of Munich, Germany.
  4. Edgar Demetrio Tovar, 2011. "Globalización financiera y sus efectos sobre el desarrollo financiero," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.

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