Bank-Based Versus Market-Based Financial Systems: A Growth-Theoretic Analysis

39 Pages Posted: 6 Nov 2002

See all articles by Shankha Chakraborty

Shankha Chakraborty

University of Oregon - Department of Economics

Tridip Ray

Indian Statistical Institute, New Delhi - Delhi Centre

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.

Keywords: Financial System, Income Distribution, Banks, Market Finance

JEL Classification: E22, G20, O15, O16

Suggested Citation

Chakraborty, Shankha and Ray, Tridip, Bank-Based Versus Market-Based Financial Systems: A Growth-Theoretic Analysis. Available at SSRN: https://ssrn.com/abstract=332501 or http://dx.doi.org/10.2139/ssrn.332501

Shankha Chakraborty (Contact Author)

University of Oregon - Department of Economics ( email )

Eugene, OR 97403
United States
541-346-4678 (Phone)

Tridip Ray

Indian Statistical Institute, New Delhi - Delhi Centre ( email )

7 S .J. S.
Sansanwal Marg
New Delhi, 110016
India

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