Increasing Returns, Long-Run Growth and Financial Intermediation
This paper identifies a novel connection between the banking sector and economic growth. I consider strategic competition among banks in an economic growth model with externalities. The allocation delivered by the banking sector is proven to be different from that in the Walrasian equilibrium and Pareto superior to it in most cases. This result challenges prevailing views in three literatures. The banking literature has always assumed some frictions in the economy so that banks can survive. Here I show that such assumptions are not necessary for the existence of banks. The literature on strategic intermediaries argues that the equilibrium achieves the Walrasian equilibrium at best. Here I show that the equilibrium delivered by strategic competition among banks often achieves an allocation that is Pareto superior to the Walrasian equilibrium. Finally, the literature of new growth theories with externalities has been concerned with lack of incentives for nonrival goods and inefficiency of the decentralized equilibrium. In some cases, authors have had to assume monopolistic competition in order to sustain economic growth. This paper shows that a decentralized, competitive economy can pay rewards for nonrival goods. In particular, it achieves the Pareto optimal allocation in the widely used case where the production function exhibits the constant returns to the accumulated capital.
|Date of creation:||01 Aug 2000|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1545. 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: (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.