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Banks as Catalysts of the Big Push

  • Marco Da Rin
  • Thomas Hellmann

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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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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  1. Durlauf, Steven N, 1993. "Nonergodic Economic Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 349-66, April.
  2. 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.
  3. 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.
  4. Milgrom, Paul & Roberts, John, 1995. "The Economics of Modern Manufacturing: Reply," American Economic Review, American Economic Association, vol. 85(4), pages 997-99, September.
  5. 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.
  6. Andrei Shleifer & Robert W. Vishny, 1987. "The Efficiency of Investment in the Presence of Aggregate Demand Spillovers," NBER Working Papers 2297, National Bureau of Economic Research, Inc.
  7. Krugman, Paul, 1991. "History versus Expectations," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 651-67, May.
  8. Kiminiori Matsuyama, 1994. "Complementaries and Cumulative Processes In Models of Monopolistic Competition," Discussion Papers 1106, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. 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.
  10. Kevin M. Murphy & Andrei Shleifer & Robert W. Vishny, 1988. "Industrialization and the Big Push," NBER Working Papers 2708, National Bureau of Economic Research, Inc.
  11. Kiyotaki, Nobuhiro, 1988. "Multiple Expectational Equilibria under Monopolistic Competition," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 695-713, November.
  12. Kiminori Matsuyama, 1990. "Increasing Returns, Industrialization and Indeterminacy of Equilibrium," Discussion Papers 878, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  13. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
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