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Banks as Catalysts of the Big Push

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  • Marco Da Rin
  • Thomas Hellmann

Abstract

A literature has developed to substantiate Rosenstein-Rodan's intuition that coordination of a critical mass of investments may induce industrialization through a 'big push'. This literature has essentially ignored the question of what economic institutions may overcome the coordination failures which give rise to an 'underdevelopment trap'. In this paper we propose that banks may act as a 'catalyst' for the 'big push'. Our work is motivated by historic evidence that suggest an association between a 'big push' and the emergence of large banks. We develop a model based on Murphy, Shleifer and Vishny (1989) and show that a 'large' bank with sufficient market power can induce the 'big push' by coordinating the investments of a subset of firms in the economy. This creates a critical mass of demand that induces other firms to invest as well. A bank may coordinate firms directly, but more importantly indirectly, that is through the terms of its loans, offering either a low interest rate or investment guarantees. We also show that a overnment might in principle improve on the private market outcome (by subsidizing a bank's coordination activities), but that problems of incentives, credibility and dynamic efficiency makes this difficult.

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 98.

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Handle: RePEc:igi:igierp:98

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References

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  1. Antonio Ciccone & Kiminori Matsuyama, 1995. "Start-up costs and pecuniary externalities as barriers to economic development," Economics Working Papers 142, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Steven N. Durlauf, 1991. "Nonergodic Economic Growth," NBER Working Papers 3719, National Bureau of Economic Research, Inc.
  3. Kiminori Matsuyama, 1995. "Complementarities and Cumulative Processes in Models of Monopolistic Competition," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 701-729, June.
  4. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1989. "Industrialization and the Big Push," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1003-26, October.
  5. Shleifer, Andrei & Vishny, Robert W, 1988. "The Efficiency of Investment in the Presence of Aggregate Demand Spillovers," Journal of Political Economy, University of Chicago Press, vol. 96(6), pages 1221-31, December.
  6. Kiyotaki, Nobuhiro, 1988. "Multiple Expectational Equilibria under Monopolistic Competition," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 695-713, November.
  7. Kiminori Matsuyama, 1990. "Increasing Returns, Industrialization and Indeterminacy of Equilibrium," Discussion Papers 878, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  8. Milgrom, Paul & Roberts, John, 1995. "The Economics of Modern Manufacturing: Reply," American Economic Review, American Economic Association, vol. 85(4), pages 997-99, September.
  9. repec:fth:stanho:e-92-18 is not listed on IDEAS
  10. Cooper, Russell & John, Andrew, 1988. "Coordinating Coordination Failures in Keynesian Models," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 441-63, August.
  11. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
  12. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 651-67, May.
  13. Okuno-Fujiwara, Masahiro, 1988. "Interdependence of industries, coordination failure and strategic promotion of an industry," Journal of International Economics, Elsevier, vol. 25(1-2), pages 25-43, August.
  14. Fafchamps, Marcel & Helms, Brigit, 1996. "Local demand, investment multipliers, and industrialization: Theory and application to the Guatemalan highlands," Journal of Development Economics, Elsevier, vol. 49(1), pages 61-92, April.
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Cited by:
  1. Marco Da Rin & Thomas Hellmann, 2001. "Banks as Catalysts for Industrialization," William Davidson Institute Working Papers Series 443, William Davidson Institute at the University of Michigan.

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