Document Type
Discussion Paper
Publication Date
5-1-1995
CFDP Number
1100
CFDP Pages
74
Abstract
We use a simple, graphical moral hazard model to compare monitored bank lending versus non-monitored bond issues as sources of external funds for industry. We contrast the conditions that theoretically favor each system, such as the size and number of firms, with conditions prevailing when these financial systems were developed during the British and German Industrial Revolutions. Then, to address the question why different systems have persisted, we embed the model in an entry game in which firm size and number are endogenous. We show that multiple equilibria can exist if financiers take the industrial structure as given and vice versa. Finally, we compare these equilibria in welfare terms.
Recommended Citation
Baliga, Sandeep and Polak, Ben, "Banks versus Bonds: A Simple Theory of Comparative Financial Institutions" (1995). Cowles Foundation Discussion Papers. 1343.
https://elischolar.library.yale.edu/cowles-discussion-paper-series/1343