Institutions, Markets and Growth: A Theory of Comparative Corporate Governance

48 Pages Posted: 31 Oct 2008  

Kose John

New York University (NYU) - Department of Finance

Simi Kedia

Rutgers Business School

Date Written: November 2006

Abstract

Two different financial systems with some opposing features have evolved in the advanced economies, namely the insider system and the outsider system. In this paper, we provide a theoretical framework where the features of the optimal governance systemare derived as a function of economy-wide parameters, such as the degree of development of markets and the quality of the institutions, and firm-specific parameters,such as the productivity of its technology. Our results include the following: (1) For adegree of relative development of markets below a threshold, internal governance systems dominate for all firms in the economy independent of productivity, (2) When thedevelopment of markets in an economy is above that threshold, either system may emerge as optimal depending on the productivity of the technology. There are marked differences in the residual agency costs under the two systems when the scale of investment is large. It is shown that insider systems constitute the optimal governance system for technologies that are optimally implemented at a small scale while outsider systems dominate for technologies that are optimally implemented at large scales. These results provide a new argument for the potential convergence towards outsider systems based on technological growth.

Suggested Citation

John, Kose and Kedia, Simi, Institutions, Markets and Growth: A Theory of Comparative Corporate Governance (November 2006). NYU Working Paper No. CLB-06-020. Available at SSRN: https://ssrn.com/abstract=1291608

Kose John (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Simi Kedia

Rutgers Business School ( email )

117 Levin
94 Rockafellar Road
Piscataway, NJ
United States
8484454195 (Phone)

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