The Equilibrium Size of the Financial Sector

35 Pages Posted: 3 Nov 2008  

Thomas Philippon

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: August 2007

Abstract

Over the past 60 years, the value added of the U.S. financial sector has grown from 2.3%to 7.7% of GDP. I present a model of the equilibrium size of this industry and I studythe factors that might explain its evolution. According to the model, a shift in the jointdistribution of cash flows and investment opportunities across U.S. firms has increasedthe demand for financial services. Improvements in the relative efficiency of the finance industry also play a role. Without these improvements, a much larger fraction of firms would be financially constrained today.

Suggested Citation

Philippon, Thomas, The Equilibrium Size of the Financial Sector (August 2007). NYU Working Paper No. FIN-07-007. Available at SSRN: https://ssrn.com/abstract=1293141

Thomas Philippon (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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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