Bank-based versus Market-based Financial Systems: A Growth-theoretic Analysis
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Date
2003-02-01
Authors
Chakraborty, Shankha
Ray, Tridip
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept. of Economics
Abstract
We study bank-based and market-based financial systems in an endogenous growth model. Lending to firms is fraught with moral hazard as owner-managers may reduce investment profitability to enjoy private benefits. Bank monitoring partially resolves the agency problem, while market-finance is more ‘hands-off’. A bank-based or market-based system emerges from firm financing choices. It is not possible to say unequivocally which of the two systems is better for growth. The growth rate depends, crucially, on the efficiency of financial and legal institutions. But a bank-based system outperforms a market-based one along other dimensions. Investment and per capita income are higher, and income inequality lower, under a bank-based system. Bank-based systems are more conducive for broad-based industrialization. A temporary income redistribution, under both financial systems, results in permanent improvement in per capita income as well as income distribution.
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Keywords
Market finance, Banks and banking, Income distribution, Financial system, Macroeconomics