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AN EXPLANATION FOR THE DIVERSITY OF FINANCIAL STRUCTURE

Published online by Cambridge University Press:  04 September 2013

Niloy Bose  and
Rebecca Neumann
Niloy Bose*
Affiliation:
University of Wisconsin–Milwaukee
Rebecca Neumann
Affiliation:
University of Wisconsin–Milwaukee
*
Address correspondence to: Niloy Bose, Department of Economics, University of Wisconsin–Milwaukee, Milwaukee, WI 53201, USA; e-mail: [email protected].
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Abstract

This paper seeks to provide a theoretical explanation for the weak association between measures of financial structure—as defined by the mixture of bank-based and market-based financial systems in an economy—and economic development. Lenders fund risky investment projects of firms by drawing up loan contracts in the presence of an informational asymmetry. An optimal contract entails the issue of debt, equity, or a mix of the two. The equilibrium choice of contract and the financial structure depend on the state of the economy, which in turn depends on the contracting regime. Based on this analysis, the paper provides a theory that can explain the wide diversity of financial structure among middle-income countries.

Keywords

Financial StructureEconomic Development
Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 2 , March 2015 , pp. 270 - 287
Copyright
Copyright © Cambridge University Press 2013 

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