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Bank-based versus Market-based Financial Systems: A Growth-theoretic Analysis

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Author Info
Shankha Chakraborty () (University of Oregon Economics Department)
Tridip Ray () (Hong Kong University of Science & Technology Economics Department)

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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. It is not possible to say unequivocally which of the two systems is better for growth. The growth rate depends, crucially, 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 more conducive for broad-based industrialization. A temporary income redistribution, under both financial systems, results in permanent improvement in per capita income as well as income distribution.

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Paper provided by University of Oregon Economics Department in its series University of Oregon Economics Department Working Papers with number 2003-6.

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Length: 39
Date of creation: 01 Feb 2003
Date of revision: 01 Feb 2002
Handle: RePEc:ore:uoecwp:2003-6

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Related research
Keywords: Financial System Income Distribution Banks Market Finance

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
G20 - Financial Economics - - Financial Institutions and Services - - - General
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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References listed on IDEAS
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.:
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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. Danyang Xie & Chi-Wa Yuen, 2003. "A Dynamic General Equilibrium Framework of Investment with Financing Constraint," IMF Staff Papers, Palgrave Macmillan Journals, vol. 50(2), pages 6. [Downloadable!] (restricted)
  2. Christopher F. Baum & Dorothea Schäfer & Oleksandr Talavera, 2008. "The Impact of Financial Structure on Firms' Financial Constraints: A Cross-Country Analysis," Boston College Working Papers in Economics 690, Boston College Department of Economics. [Downloadable!]
  3. Chi-wa Yuen & Danyang Xie, 2002. "A Dynamic General Equilibrium Framework of Investment with Financing Constraint," Macroeconomics 0207009, EconWPA. [Downloadable!]
    Other versions:
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