Banks versus Bonds: A Simple Theory of Comparative Financial Institutions
We use a simple, graphical moral hazard model to compare monitored bank lending versus non-monitored bond issues as sources of external funds for industry. We contrast the conditions that theoretically favor each system, such as the size and number of firms, with conditions prevailing when these financial systems were developed during the British and German Industrial Revolutions. Then, to address the question why different systems have persisted, we embed the model in an entry game in which firm size and number are endogenous. We show that multiple equilibria can exist if financiers take the industrial structure as given and vice versa. Finally, we compare these equilibria in welfare terms.
|Date of creation:||May 1995|
|Date of revision:|
|Contact details of provider:|| Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA|
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.yale.edu/
More information through EDIRC
|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
When requesting a correction, please mention this item's handle: RePEc:cwl:cwldpp:1100. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Matthew C. Regan)
If references are entirely missing, you can add them using this form.