Inequality, Industrialization and Financial Structure
University of Oregon - Department of Economics
Indian Statistical Institute, New Delhi - Delhi Centre
January 1, 2003
University of Oregon, Economics Working Paper No. 2003-2
We introduce monitored bank loans and non-monitored tradeable securities as sources of external finance for firms in a dynamic general equilibrium model. Due to frictions arising from moral hazard, access to credit and each type of financial instrument are determined by the wealth distribution. We study the depth of credit markets (financial development) and conditions under which the financial system relies more on either type of external finance (financial structure). Initial inequality is shown to determine financial development, with high inequality preventing developed systems from emerging. A more equitable income distribution as well as larger capital requirements of industry tend to promote a bank-based system. Investment risk promotes a greater reliance on non-monitored sources, while institutional parameters affect the financial structure in intuitively plausible ways. The model's predictions are consistent with historical and recent development experience.
Number of Pages in PDF File: 45
Keywords: Inequality, Industrialization, Financial, Development, Financial Structure, Bank Finance, Market Finance, Credit Frictions
JEL Classification: E44, G20, G30, O15, O16working papers series
Date posted: September 10, 2003
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.484 seconds