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Investment in Relationship-Specific Assets: Does Finance Matter?

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Author Info
Kukenova, Madina
Strieborny, Martin

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Abstract

We show that contract-intensive industries grow disproportionately faster both in countries with a high initial level of financial development and in the US states which deregulated their banking sector. These industries use a high share of relationship-specific inputs that can be purchased only via specific contracts with the suppliers. Accordingly, both firms in those industries and their suppliers face above-average levels of risk and transaction costs. Our empirical results thus confirm the theoretical claim that finance promotes the real economy via managing risk and decreasing transaction costs. Furthermore, the pro-growth effect of finance seems to come from financial intermediaries like banks rather than from stock markets. This suggests that the intrinsic functions of relationship-banking (long-term commitment, increase in reputation and planning horizon of the borrowers) are especially important for the contract-intensive industries.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16051.

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Date of creation: 03 Jul 2009
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Handle: RePEc:pra:mprapa:16051

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Related research
Keywords: financial development; relationship-specific investment; growth;

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Find related papers by JEL classification:
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
O40 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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