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on Financial Development and Growth |
| By: | Burga, Carlos; Cespedes, Jacelly; Parra, Carlos R; Ricca, Bernardo |
| Abstract: | A long-standing debate concerns whether technological change widens wage gaps by benefiting skilled labor. We show that financial technologiesspecifically, instant payment systemscan instead reduce wage inequality. Using an administrative dataset covering all registered employees in Brazil, we study the nationwide rollout of Pix, an instant payment platform introduced in late 2020. Our empirical strategy is a triple difference-in-differences design that exploits variation in preexisting mobile penetration across municipalities, the differential benefits of Pix for cash-intensive versus non-cash-intensive sectors, and the timing of Pixs rollout. A one standard deviation increase in mobile penetration leads to a 1.2 percent wage increase in cash-intensive sectors relative to non-cash-intensive sectors following Pixs introduction. These wage gains are concentrated among workers with less education, reducing the college wage premium by 1 percentage point. Further evidence suggests that increased small-business labor demand, amplified by local labor market frictions, drives these effects. Overall, instant payment systems disproportionately benefit small, cash-intensive businesses, enhancing labor demand in sectors reliant on low-skill workers and highlighting how financial technologies can shape distributional outcomes differently from skill-biased technologies. |
| JEL: | J31 O33 G23 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:idb:brikps:14416 |
| By: | Nicola Cortinovis |
| Abstract: | Entrepreneurs in rural areas face much greater difficulties than those located in cities, also with respect to the access to entrepreneurial finance. Recent developments in the provision of capital, however, have opened new opportunities for small firms and start-ups to obtain funding. In this empirical work, I hypothesize that crowdfunding provides crucial resources and support for rural-based entrepreneurs and that rural areas characterized by greater (bridging) social capital are better positioned to benefit from the opportunities of crowdfunding. Using a newly developed database linking crowdfunding campaigns to industry and counties in the U.S. (KIUS), county-level information on social capital and official U.S. census data, I test these hypotheses. My findings indicate that crowdfunding is indeed positively related to the number of ventures operating in the industry-location in the following period. In addition, this relationship is stronger for counties with higher levels of bridging social capital and of civic engagement. The results are robust to a number of checks, including a placebo test and matching exercises. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:egu:wpaper:2535 |
| By: | Michael Barczay; Mr. Shafik Hebous; Fayçal Sawadogo; Jean-François Wen |
| Abstract: | Mobile money has become a central digital alternative to traditional banking in developing countries, yet several African governments have introduced taxes on mobile money transactions. We develop a model that characterizes how such taxes affect payment choices and generate excess burden. The model predicts that taxation reduces mobile money use, with elasticities shaped by access to substitutes and transaction costs: banked users substitute into formal alternatives, while unbanked users face higher effective costs, making the tax regressive. Taxation also induces substitution into cash, raising informality. We empirically test these predictions using cross-country survey data and novel transaction-level data from Cameroon, the Central African Republic, and Mali. Results show sharp declines in mobile money usage, with stronger responses among the banked. Unbanked and rural users bear a disproportionate burden. We use the empirical estimates to gauge the excess burden of the tax, which we quantify at 35% of revenue—highlighting its significant efficiency cost alongside its regressive impact. |
| Keywords: | Mobile Money Tax; Financial Inclusion; Transaction Taxes |
| Date: | 2025–12–05 |
| URL: | https://d.repec.org/n?u=RePEc:imf:imfwpa:2025/255 |
| By: | Hui, Xitong |
| Abstract: | Can rising asset prices reduce wealth inequality? This paper builds a continuous-time heterogeneous-agent general equilibrium in which entrepreneurs hold risky private capital and traditional savers hold safe assets. Safe-asset expansions—via financial innovation, public debt, or a stable equity bubble—operate through a single pass-through: they lower entrepreneurs’ undiversified risk exposure, compress risk premia, and raise the interest rate. This slows entrepreneurial wealth accumulation and redistributes wealth toward traditional savers, so inequality falls even as risky asset valuations rise. Savers gain unambiguously. Entrepreneurs’ welfare is state-dependent: when their wealth share is low, they prefer a higher risk premium and lose from safe-asset expansions; once sufficiently wealthy, they prefer a higher interest rate that protects a larger wealth base and gain. JEL Classification: D31, G12, E21, E44 |
| Keywords: | asset prices, interest rates, safe assets, wealth inequality, welfare |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253162 |
| By: | Brand, Claus; Goy, Gavin; Lemke, Wolfgang |
| Abstract: | Using a novel macro-finance model we infer jointly the equilibrium real interest rate r*, trend inflation, interest rate expectations, and bond risk premia for the United States. In the model r* plays a dual macro-finance role: as the benchmark real interest rate that closes the output gap and as the time-varying long-run real interest rate that determines the level of the yield curve. Our estimated r* declines over the last decade, with estimation uncertainty being relatively contained. We show that both macro and financial information is important to infer r*. Accounting for the secular decline in interest rates renders term premia more stable than those based on stationary yield curve models. A previous version of this paper by the same authors entitled “Natural rate chimera and bond pricing reality” has been published as ECB Working Paper No 2612. JEL Classification: E43, C32, E52, C11, G12 |
| Keywords: | arbitrage-free Nelson-Siegel term structure model, Bayesian estimation, equilibrium real rate, natural interest rate, term premia |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:ecb:ecbwps:20253160 |
| By: | Weikang Zhang; Alison Watts |
| Abstract: | Crypto enthusiasts claim that buying and holding crypto assets yields high returns, often citing Bitcoin's past performance to promote other tokens and fuel fear of missing out. However, understanding the real risk-return trade-off and what factors affect future crypto returns is crucial as crypto becomes increasingly accessible to retail investors through major brokerages. We examine the HODL strategy through two independent analyses. First, we implement 480 million Monte Carlo simulations across 378 non-stablecoin crypto assets, net of trading fees and the opportunity cost of 1-month Treasury bills, and find strong evidence of survivorship bias and extreme downside concentration. At the 2-3 year horizon, the median excess return is -28.4 percent, the 1 percent conditional value at risk indicates that tail scenarios wipe out principal after all costs, and only the top quartile achieves very large gains, with a mean excess return of 1, 326.7 percent. These results challenge the HODL narrative: across a broad set of assets, simple buy-and-hold loads extreme downside risk onto most investors, and the miracles mostly belong to the luckiest quarter. Second, using a Bayesian multi-horizon local projection framework, we find that endogenous predictors based on realized risk-return metrics have economically negligible and unstable effects, while macro-finance factors, especially the 24-week exponential moving average of the Fear and Greed Index, display persistent long-horizon impacts and high cross-basket stability. Where significant, a one-standard-deviation sentiment shock reduces forward top-quartile mean excess returns by 15-22 percentage points and median returns by 6-10 percentage points over 1-3 year horizons, suggesting that macro-sentiment conditions, rather than realized return histories, are the dominant indicators for future outcomes. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.02029 |
| By: | Herrera Aguilera, Santiago; Hurlin, Christophe; Isaka, Hironobu |
| Abstract: | This paper estimates growth-maximizing levels of public capital and investment across countries using a structural framework that accounts for three critical features: public investment efficiency, human capital levels, and congestion effects. A harmonized panel data set covering 166 countries over 1960–2024 was assembled to estimate public capital output elasticities for the entire sample and for countries clustered by income group. These estimates are used to calibrate an endogenous growth model yielding closed-form expressions for the optimal public investment-to-output ratio. The analysis finds a public capital output elasticity of around 0.20, which implies that countries invest slightly below their growth-maximizing levels. For the full sample and a homogeneous elasticity of public capital, the observed investment-to-output ratio averages 4.6 percent, significantly below the growth-maximizing level of 5.4 percent. The shortfall in aggregate investment becomes even more significant when using higher output elasticities of public capital. The aggregate results show considerable heterogeneity: public investment in advanced and emerging economies is, on average, 1.5 to 1.8 percent of gross domestic product below the growth- maximizing levels, while in low-income countries the gap is far wider at 3.2 percent of gross domestic product. Improving public expenditure efficiency can enable countries to increase investment without compromising fiscal sustainability. The analysis also finds that countries with large resource revenues, greater revenue and expenditure volatility, weaker fiscal governance, and lower institutional quality are more likely to have excessive levels of public investment. These results provide benchmarks for assessing public investment gaps and underscore the importance of expenditure efficiency, high-quality fiscal governance, and robust public institutions in achieving optimal levels of public investment. |
| Date: | 2025–12–04 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11272 |
| By: | Jonathan Payne; Bálint Szőke |
| Abstract: | US federal debt plays a special economic role giving the US government a funding advantage compared to the private sector. Is this an immutable feature of US treasuries arising from a treasury demand function or an equilibrium outcome influenced by government policies? New US historical yield curve estimates are consistent with the later—US financial market interventions coincide with simultaneous increases in US debt issuance and funding advantage when treasury risk remains low. We build a model where US funding advantage emerges from the financial sector's ability to use treasuries to hedge risk. Financial regulation can amplify the hedging properties of US treasuries by creating captive demand in bad times but only if the government runs stable fiscal policy to protect long-run treasury prices. Ultimately, the government cannot simultaneously choose: (i) high funding advantage, (ii) financial sector stability, and (iii) fiscal policy that destabilizes treasury prices. Balancing these tradeoffs has far-reaching welfare implications. |
| Keywords: | convenience yields; government debt; financial repression; safe assets |
| Date: | 2025–09 |
| URL: | https://d.repec.org/n?u=RePEc:rba:rbaacp:acp2025-06 |
| By: | José E. Bosca; Javier Ferri; Margarita Rubio |
| Abstract: | We study the macroeconomic and welfare consequences of bond preference convergence within a monetary union. Using a two-country DSGE model calibrated to Germany and Spain, we compare two scenarios: convergence toward Spanish bond preferences and convergence toward German bond preferences. The direction of convergence proves decisive. When preferences shift toward those of Spain, union-wide private debt expands, long-run GDP declines, and macro-financial volatility rises, though inflation volatility falls. Welfare increases for the union as a whole in this scenario, with Germany gaining the most and Spain benefiting more modestly. By contrast, convergence toward German bond preferences reduces union-wide private debt and output volatility, but generates only moderate welfare gains for Germany and significant welfare losses for Spain. These results highlight that financial convergence does not yield uniform benefits. Its consequences depend on both the direction of convergence and its distributional effects across countries and households. The findings also point to a trade-off between welfare and stability, underscoring the need for macroprudential tools and fiscal arrangements to manage the risks associated with deeper convergence in bond preferences. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:fda:fdaddt:2025-12 |
| By: | Farooq, Imran; Mavrotas, George; Cassimon, Danny |
| Abstract: | The paper explores the effect of both temporary and permanent components of foreign aid grants and loans on Pakistan’s fiscal response over the period 1973 to 2020. It shows that temporary loans cause larger fiscal adjustments than grants, by boosting revenue and public investment while decreasing government consumption and domestic borrowing, with no effect on debt servicing. Conversely, temporary grants trigger revenue-based fiscal adjustments by raising revenue and debt service without affecting domestic borrowing or government investment, while lowering at the same time current expenses. Additionally, permanent loans lead to increased domestic borrowing without impacting revenue, along with higher current expenses and debt service, and reduced public investment. Permanent grants also lead to increased domestic borrowing due to lower revenues and a larger government. These findings highlight important policy suggestions for aid donors regarding the aid design for highly indebted aid recipient countries, advocating for grants over loans and initiating debt relief programs to prevent aid fungibility into debt servicing. The findings emanating from the paper seem also to suggest that donors should provide temporary aid for fiscal adjustments and permanent grants for investments. In contrast, expenditure-based fiscal adjustments should be conditioned on permanent loans that finance the government's current spending in recipient governments. |
| Keywords: | foreign aid; aid heterogeneity; temporary aid; permanent aid; fiscal response |
| JEL: | F35 O11 O23 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:iob:wpaper:2025.13 |
| By: | Fwaga, Sammy Oketch; Chakrapani, Deepa; Tefera, Girum Abebe |
| Abstract: | Foreign direct investment has the potential to introduce much-needed capital and expertise in emerging and developing economies. To attract foreign direct investment, many countries have eased restrictions on foreign ownership in various sectors, reformed their institutions, and set up investment promotion agencies. Until the mid-2010s, Ethiopia remained one of the few countries that resisted this trend, with several stringent restrictions in place on foreign direct investment entry and operations in the country. This study employs a synthetic control method to examine patterns in foreign capital inflows following a series of investment policy reforms that were substantively introduced in the mid-2010s (circa 2015). The study offers evidence that investment policy reforms contributed to a significant foreign direct investment inflow in Ethiopia, compared to what would have occurred in the absence of these policies. An alternative strategy that conservatively specifies the donor country pool using an AI-assisted deep search technique changes the donor pool weighting matrix of the synthetic control method, but the estimated policy effects largely remain robust to this specification. The findings highlight the importance of targeted reforms in promoting foreign direct investment inflow in developing countries. |
| Date: | 2025–12–01 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11264 |
| By: | boughabi, houssam |
| Abstract: | This research paper looks at the different economic factors that affect foreign investments in Zimbabwe, specifically the interaction between foreign investment and inflation changes. It delves into how central bank policy, in the face of erratic inflation, can affect the duration and the change of investment patterns in a macroeconomic environment full of uncertainties. The model presented in this paper embodies the interaction among inflation thresholds, money supply reactions, and capital inflows, thus depicting the scenarios of macroeconomic fragility due to late policy adjustments to structural shocks. The empirical analysis reveals an optimal inflation threshold of A*=3.02, beyond which real investment begins to decouple from monetary policy, and a neutral policy coefficient of a*=0.0000, indicating the complete erosion of policy traction under hyperinflation. These results suggest that Zimbabwe’s monetary authorities faced a regime in which stabilization efforts were rendered ineffective, emphasizing the importance of credibility restoration for regaining investment responsiveness. The findings pinpoint the issues of achieving a perfect equilibrium between inflation control and investment stimulation in a market environment with price instability. |
| Keywords: | Inflation threshold, Foreign investment, Monetary policy, Economic fragility, Zimbabwe. |
| JEL: | E31 E52 F21 O55 |
| Date: | 2025–11–10 |
| URL: | https://d.repec.org/n?u=RePEc:pra:mprapa:126785 |
| By: | Yhlas Sovbetov; Mohamed Moussa |
| Abstract: | This paper studies the macroeconomic impact of economic freedom on foreign direct investments inflows in both global and regional panel analyses involving 156 countries through the period of 1995-2016. Unlike to prior literature, it includes often neglected nations such as Fragile and Conflict-Affected states, Sub-Saharan, Oceanian, and Post-Soviet countries. The paper finds a positive impact of economic freedom on FDI under fixed-effects model in global case where a unit change in economic freedom scales FDI inflows up to 1.15 units. More specifically, all 9 regions also refer to positive and significant impact of economic freedom on FDI. The highest impact is recorded in European countries, whereas the lowest ones are documented in Fragile-Conflict affected states, Sub-Saharan zone, and Oceanian countries. |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.01695 |
| By: | John Beirne (Asian Development Bank); Pradeep Panthi (Policy Research Institute); Guna Raj Bhatta (Nepal Rastra Bank) |
| Abstract: | This paper examines the role of financial development as a buffer for the appreciating effects of remittances on exchange rates using annual data from 1996 to 2021 for 146 economies, with a focus on 43 high remittance-receiving economies. A panel regression framework is employed in the baseline analysis, which remains robust to an instrumental variables approach. The findings reveal that remittances have appreciating effects on real effective exchange rates (REER), especially in high remittance-receiving economies, consistent with the “Dutch disease” mechanism. Examining subcomponents of financial development, we find that stronger domestic financial markets and market-based financial deepening are critical channels for absorbing the REER appreciation effects of remittances |
| Keywords: | remittances;exchange rates;financial development |
| JEL: | F24 F31 G21 O16 |
| Date: | 2025–11–27 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:021791 |
| By: | Kim, Dohan; Milesi-Ferretti, Gian Maria |
| Abstract: | Over the past two decades, many emerging markets and developing economies have been viewed as increasingly resilient to external financial shocks. This paper assesses whether such resilience is broadly shared across emerging markets and developing economies by classifying them into three tiers based on economic size, income level, institutional strength, and financial integration. The analysis shows that first-tier emerging markets and developing economies have improved their external balance sheets and reduced dependence on official support. However, second- and third-tier emerging markets and developing economies have experienced growing external vulnerabilities since the global financial crisis, marked by rising external debt liabilities and declining foreign exchange reserves. Using a range of indicators, including sovereign defaults, arrears, partial defaults, and International Monetary Fund lending, the paper identifies episodes of external financial distress and shows that distress remains widespread among second- and third-tier emerging markets and developing economies. The empirical analysis confirms that key components of the net international investment position—especially external debt and foreign exchange reserves—predict the onset of external financial distress, with institutional quality shaping the impact. Weak institutions amplify risks, while strong institutions mitigate them. These findings highlight the importance of recognizing heterogeneity across emerging markets and developing economies, strengthening institutional quality alongside external balance-sheet management, and rebuilding buffers to safeguard against renewed global financial stress. |
| Date: | 2025–12–04 |
| URL: | https://d.repec.org/n?u=RePEc:wbk:wbrwps:11274 |
| By: | John Beirne (Asian Development Bank); Nuobu Renzhi (Capital University of Economics and Business in Beijing) |
| Abstract: | This paper examines the effects of country-specific geopolitical risk on capital flow volatility and asset markets across 29 emerging and advanced economies over the period 2000–2023. Using panel regressions and a panel structural vector autoregression framework, the results show that geopolitical risk raises bond yields and leads to exchange rate depreciation, with stronger and more persistent effects in emerging economies. Asset markets for advanced economies are affected mainly through lower equity prices. The impact on capital flow volatility is slightly higher on average for advanced economies but remains more persistent for emerging economies. Greater financial development, higher central bank independence, and lower public debt mitigate the adverse effects of geopolitical risk on both capital flows and asset markets. These findings highlight the importance of strong macroeconomic fundamentals and institutional frameworks in building resilience against geopolitical shocks. |
| Keywords: | geopolitical risk;capital flow volatility;financial markets |
| JEL: | G15 G41 |
| Date: | 2025–11–21 |
| URL: | https://d.repec.org/n?u=RePEc:ris:adbewp:021786 |
| By: | Charles Yuji Horioka (Center for Computational Social Science and Research Institute for Economics and Business Administration, Kobe University, Asian Growth Research Institutem, Institute of Social and Economic Research, Osaka University, Asian Growth Research Institute, JAPAN, and National Bureau of Economic Research, U.S.A.); Nicholas Ford (Wolfson College, University of Cambridge, U.K.) |
| Abstract: | In this paper, we show that the existing models and descriptions of the transfer of capital between countries that are provided in international economics are inadequate because they fail to explain the causes of, or the consequences of, persistent trade imbalances and because the assumption that there is a world interest rate, r* at which all countries can theoretically lend or borrow is extremely misleading.Instead, we argue that a more fruitful modeling approach is to regard the world as consisting of a number of regions, each of which has a particular rate of return on capital, which is a function of the local marginal product of capital (MPK). We demonstrate that such a modeling approach can provide some additional insights into who gains and loses from persistent trade deficits and how this might be affected by the Trump Administration's tariff policy. |
| Keywords: | Capital flows; Capital market imperfections; Capital mobility; Capital transfers; Current account deficits; Current account imbalances; Exchange rate; Feldstein-Horioka Paradox; Feldstein-Horioka Puzzle;Financial frictions; Financial market imperfections; Globalization; Goods market imperfections; International capital flows; International capital mobility; International financial markets; Investment; Marginal product of capital; MPK; Net capital transfers; Open economy macroeconomics; Rate of return on capital; Saving; saving-investment correlations; Tariffs; Trade barriers; Trade costs; Trade deficits; Trade frictions; Trade imbalances; Trade policy; Trump tariffs; World interest rate |
| JEL: | E43 F13 F21 F32 F41 F62 G15 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-31 |
| By: | Carlos Giraldo (Fondo Latinoamericano de Reservas - FLAR); Iader Giraldo-Salazar (Fondo Latinoamericano de Reservas - FLAR); Jose E. Gomez-Gonzalez (Department of Finance, Information Systems, and Economics, City University of New York – Lehman College); Jorge M Uribe (Universitat Oberta de Catalunya) |
| Abstract: | This paper analyzes the cyclicality of bank capital ratios in emerging and low-income economies over the period 2004–2024, with particular attention to developments following the introduction of Basel III. Using a panel of 1, 185 banks across 122 countries, we study how economic growth affects banks’ capital ratios and whether this relationship varies across regions, income groups, and levels of capitalization. Unlike risk-weighted measures, leverage-based capital ratios provide a clearer assessment of banks’ capacity to absorb shocks and support credit supply during downturns. Our findings indicate that prior to 2014, capital ratios were broadly procyclical, but in the last decade this relationship has weakened or reversed in many emerging economies. Banks with higher capital buffers exhibit the strongest countercyclical behavior, reflecting an enhanced ability to sustain lending under adverse conditions, while banks operating near regulatory minima remain largely acyclical, constrained by regulatory requirements. Regional heterogeneity is pronounced, with Latin America, developing Asia, and the Middle East showing the most substantial improvements. The results suggest that the principles underlying modern macroprudential regulation, particularly the accumulation of countercyclical capital in expansions to support lending in downturns, are increasingly influencing bank behavior, even in jurisdictions where Basel III has not been fully implemented. |
| Keywords: | Bank Capital Ratios; Procyclicality; Countercyclical Capital Buffers; Emerging Markets; Macroprudential Regulation |
| JEL: | G21 E44 F36 |
| Date: | 2025–12–04 |
| URL: | https://d.repec.org/n?u=RePEc:col:000566:021826 |
| By: | Carl White |
| Abstract: | Learn about research, particularly around bank failures’ effects on businesses and the economy, presented at the 2025 Community Banking Research Conference. |
| Keywords: | bank failures; small business lending; community banks |
| Date: | 2025–12–11 |
| URL: | https://d.repec.org/n?u=RePEc:fip:l00001:102202 |
| By: | Omar Abdelrahman; Josef Schroth |
| Abstract: | When a bank holds a lot of safe assets, it is well situated to deal with funding stress. But when all banks hold a lot of safe assets, a pecuniary externality implies that their (wholesale) funding costs increase. This reduces banks’ ability to hold capital buffers and thus, paradoxically, increases the frequency of funding stress. |
| Keywords: | Business fluctuations and cycles; Credit and credit aggregates |
| JEL: | E4 E44 E6 G2 G21 G28 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:bca:bocsan:25-28 |
| By: | Douglas Cumming; My Nguyen; Anh Viet Pham; Ama Samarasinghe |
| Abstract: | We examine the role of cybercrime legislation around the world in shaping the stability of the banking system. We compile a novel dataset covering the enactment of cybercrime legislation in 132 developed and developing countries to empirically test this research question. We find that the enactment of cybercrime laws enhances the stability of the banking sector. This key finding holds across a comprehensive suite of robustness tests, including alternative measures of bank stability and model specifications. We document significant cross-sectional heterogeneity, with the effect being more pronounced in countries with heavier penalties for illegal cyber activities and legal frameworks that hold banks accountable for their cybersecurity practices. In addition, the positive impact is stronger in jurisdictions with greater international legal cooperation and effective enforcement mechanisms. We further investigate two channels (i.e., funding liquidity and operational risk) through which cybercrime laws may influence bank stability. Our results indicate that these laws can significantly bolster bank stability by enhancing funding liquidity and mitigating operational risk. Overall, our study highlights the crucial role of cybercrime legislation in fostering a secure and resilient banking environment. It offers new insights into how these laws contribute to bank stability on both individual and systemic levels. |
| Date: | 2025–11 |
| URL: | https://d.repec.org/n?u=RePEc:arx:papers:2512.01237 |
| By: | Hideshi Itoh (Waseda Business School, Waseda University, JAPAN); Takashi Shimizu (Graduate School of Economics, Kobe University, JAPAN); Yasuo Takatsuki (Research Institute for Economics and Business Administration, Kobe University, JAPAN) |
| Abstract: | This paper examines the interaction between formal and relational enforcement in early modern Japan, focusing on financial relationships between Daimyo (regional lords) and merchants. Due to class distinctions, loans from merchants to Daimyo lacked legal enforceability, while contracts among merchants were court-enforceable. Some merchants built long-term self-enforcing relationships with Daimyo (becoming Tachiiri), whereas others provided short-term formal loans to underfunded Tachiiri. We develop a model with two markets—one that matches Daimyo with merchants, and the other that matches underfunded Tachiiri with lending merchants—and identify conditions for their co-existence in equilibrium. The analysis shows that merchants value becoming Tachiiri for long-term gains, and that the opportunities for short-term formal lending enhance the sustainability of relational contracts between Daimyo and Tachiiri. |
| Keywords: | Relational contracts; Formal contracts; Matching markets; Financial relationships; Early modern Japan |
| JEL: | C73 D53 D83 D86 N25 |
| Date: | 2025–12 |
| URL: | https://d.repec.org/n?u=RePEc:kob:dpaper:dp2025-33 |