We use a moral hazard model to compare monitored (nontraded) bank loans and traded (nonmonitored) bonds as sources of external funds for industry. We contrast the theoretical conditions that favor each system with the historical conditions prevailing when these financial systems evolved during the British and German industrial revolutions. To study persistence, we consider an entry model where financiers take the industrial structure as given when they lend and firms take the financial system as given when they borrow. We show multiple equilibria can exist, compare equilibria in welfare terms, and discuss their robustness to coordination between lenders and borrowers. Copyright 2004, Oxford University Press.
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Paper provided by Institute for Advanced Study, School of Social Science in its series Economics Working Papers with number
0005.
Length: 35 pages Date of creation: Jun 2001 Date of revision: Publication status: Published in Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 17 (1), pp. 129-163 Handle: RePEc:ads:wpaper:0005
Find related papers by JEL classification: N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information G20 - Financial Economics - - Financial Institutions and Services - - - General
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