Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/221577
Authors: 
Baliga, Sandeep
Polak, Ben
Year of Publication: 
1998
Series/Report no.: 
Discussion Paper No. 1221
Abstract: 
We use a simple graphical moral hazard model to compare monitored (non-traded) bank loans versus traded (non-monitored) bonds as sources of external funds for industry. We contrast the conditions that theoretically favour each system, such as the size and number of firms, with conditions prevailing when these financial systems evolved during the British and German industrial revolutions. Then, to address why different systems have persisted, we consider a larger model with entry so that firm size and number are endogenous. We show that multiple equilibria can exist if financiers take the industrial structure as given and vice versa, and we compare these equilibria in welfare terms. Finally, we argue that with, if bilateral co-ordination is possible, Anglo-Saxon style finance systems can only persist if they are efficient, but an economy can get stuck in an inefficient German style system.
Document Type: 
Working Paper

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