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Banks as Catalysts for Industrialization

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Author Info
Marco Da Rin
Thomas Hellmann

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Abstract

Much of the recent growth and development literature is based on the notion that economies may exhibit multiple equilibria, due to coordination failures. Surprisingly, little attention has been given to analyze which economic institutions may solve such failures. We examine the role of banks as `catalysts' for industrialization. When there are limits to contracting, and complementarities exist among investments of different firms, we derive coordination costs endogenously and show that banks can acts as catalysts provided that: (i) they are sufficiently large to mobilize a critical mass of firms, and (ii) they possess sufficient market power to make profits from coordination. We also show that the costs of coordination depend critically on the contracting instruments available to banks. In particular, allowing banks to hold equity reduces and sometimes eliminates the cost of coordination. We use our results to interpret the patterns of early industrialization of Belgium, Germany, and Italy in the late 19th century. These countries experienced quick industrialization with the active involvement of large and powerful universal banks, which engaged in both debt and equity finance.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 103.

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Da Rin, Marco & Hellmann, Thomas F., 2002. "Banks as Catalysts for Industrialization," Research Papers 1398, Stanford University, Graduate School of Business. [Downloadable!]
    Other versions:
  2. Catherine deFontenay, 2000. "Market Power and the Failure of the Big Push: Evidence and Theory," Econometric Society World Congress 2000 Contributed Papers 1269, Econometric Society. [Downloadable!]
  3. Boot, Arnoud W A & Milbourn, Todd, 2002. "Credit Ratings as Coordination Mechanism," CEPR Discussion Papers 3331, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Nicola Cetorelli & Philip Strahan, 2004. "Finance as a barrier to entry: bank competition and industry structure in local U.S. markets," Working Paper Series WP-04-04, Federal Reserve Bank of Chicago. [Downloadable!]
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  5. Sumon Kumar Bhaumik & Jenifer Piesse, 2006. "Does lending behaviour of banks in emerging economies vary by ownership? Evidence from the Indian banking sector," CEDI Discussion Paper Series 06-01, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
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  6. Thomas Gehrig & Rune Stenbacka, 2003. "Venture Cycles: Theory and Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  7. Lili Xie, 2007. "Universal Banking, Conflicts of Interest and Firm Growth," Working Papers 200703, Ball State University, Department of Economics, revised Jul 2007. [Downloadable!]
  8. Nico Voigtländer & Joachim Voth, 2005. "Why England? Demand, Growth and Inequality During the Industrial Revolution," Economics Working Papers 857, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2006. [Downloadable!]
  9. Sanjay Basu & Swapnendu Bandyopadhyay (Banerjee), 2005. "Relationship Banking, State Co-Ordination and Long-Term Debt: Reinterpreting the Big Push," Departmental Working Papers wp0502, National University of Singapore, Department of Economics. [Downloadable!]
  10. Giacinta Cestone & Lucy White, . "Anti-Competitive Financial Contracting: The Design Of Financial Claims," UFAE and IAE Working Papers 453.00, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
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  11. Michael Graff, 2005. "Is There an Optimum Level of Financial Activity?," KOF Working papers 05-106, KOF Swiss Economic Institute, ETH Zurich. [Downloadable!]
  12. Kjetil Bjorvatn & Nicola D. Coniglio, 2007. "How should industrial policy be designed in developing countries?," series 0014, Dipartimento di Scienze Economiche - Università di Bari, revised Feb 2007. [Downloadable!]
  13. Lili Xie, 2007. "Universal Banking, Conflicts of Interest and Firm Growth," Journal of Financial Services Research, Springer, vol. 32(3), pages 177-202, December. [Downloadable!] (restricted)
  14. Costas Aariadis & John Stachurski, 2004. "Poverty Traps," Department of Economics - Working Papers Series 913, The University of Melbourne. [Downloadable!]
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    • Azariadis, Costas & Stachurski, John, 2005. "Poverty Traps," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 5 Elsevier. [Downloadable!] (restricted)
  15. Arnoud W.A. Boot & Todd T. Milbourn, 2002. "Credit Ratings as Coordination Mechanisms," Tinbergen Institute Discussion Papers 02-058/2, Tinbergen Institute. [Downloadable!]
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  17. Koetter, Michael & Wedow, Michael, 2005. "Finance and growth in a bank-based economy: is it quantity or quality that matters?," Discussion Paper Series 2: Banking and Financial Studies 2006,02, Deutsche Bundesbank, Research Centre. [Downloadable!]
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