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Financial Architecture and Economic Performance: International Evidence

  • Solomon Tadesse

The paper examines the relations between the architecture of an economy's financial system - its degree of market orientation - and economic performance in the real sector. We argue that the relative effectiveness of bank-based versus market-based financial systems depends on the strength of the contractual environment and the extent of agency problems in the economy. We find that while market-based systems outperform bank-based systems among countries with developed financial sectors, bank-based systems fare better among countries with underdeveloped financial sectors. Countries dominated by small firms grow faster in bank-based systems and those dominated by larger firms in market-based systems. The findings suggest that recent trends in financial development policies that indiscriminately prescribe market-oriented financial-system-architecture to emerging and transition economies might be misguided because suitable financial architecture, in and of itself, could be a source of value.

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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp449.pdf
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Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 449.

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Length: pages
Date of creation: 01 Aug 2001
Date of revision:
Handle: RePEc:wdi:papers:2001-449
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