nep-mfd New Economics Papers
on Microfinance and Financial Development
Issue of 2005‒01‒02
three papers chosen by
Iman van Lelyveld
De Nederlandsche Bank

  1. Financial Institutions and The Wealth of Nations: Tales of Development By Jian Tong; Chenggang Xu
  2. Quality of Institutions, Credit Markets and Bankruptcy By Christa Hainz
  3. Financial System and Economic Growth in Chile. By Leonardo Hernández; Fernando Parro

  1. By: Jian Tong; Chenggang Xu
    Abstract: Interactions between economic development and financial development are studied by looking at the roles of financial institutions in selecting R&D projects (including for both imitation and innovation). Financial development is regarded as the evolution of the financing regimes. The effectiveness of R&D selection mechanisms depends on the institutions and the development stages of an economy. At higher development stages a financing regime with ex post selection capacity is more effective for innovation. However, this regime requires more decentralized decision-making, which in turn depend on contract enforcement. A financing regime with more centralized decision-making is less affected by contract enforcement but has no ex post selection capacity. Depending on the legal institutions, economies in equilibrium choose regimes that lead to different steady-state development levels. The financing regime of an economy also affects development dynamics through a 'convergence effect' and a 'growth intertia effect'. A backward economy with a financing regime with centralized decision-making may catch up rapidly when the convergence effect and the growth inertia effect are in the same direction. However, this regime leads to large development cycles at later development stages. Empirical implications are discussed.
    Keywords: Development, transition, financial institutions, R&D.
    Date: 2004–03
    URL: http://d.repec.org/n?u=RePEc:cep:stitep:/2004/469&r=mfd
  2. By: Christa Hainz
    Abstract: The number of firm bankruptcies is surprisingly low in economies with poor institutions. We study a model of bank-firm relationship and show that the bank’s decision to liquidate bad firms has two opposing effects. First, the bank receives a payoff if a firm is liquidated. Second, it loses the rent from incumbent customers that is due to its informational advantage. We show that institutions must improve significantly in order to yield a stable equilibrium in which the optimal number of firms is liquidated. There is also a range where improving institutions may decrease the number of bad firms liquidated.
    Keywords: credit markets, institutions, bank competition, information sharing, bankruptcy, relationship banking
    JEL: D82 G21 G33 K10
    Date: 2004
    URL: http://d.repec.org/n?u=RePEc:ces:ceswps:_1362&r=mfd
  3. By: Leonardo Hernández; Fernando Parro
    Abstract: This paper presents a brief overview of the current state of financial development in Chile, comparing it with other countries. After providing a short summary of the most important financial reforms of past decades, we highlight the main strengths and weaknesses of Chile’s financial markets. Next, we focus on some of the currently most pressing issues, namely, stock market liquidity, financial derivatives and venture capital, and discuss whether or not recent reforms and proposed ones properly address them.
    Date: 2004–12
    URL: http://d.repec.org/n?u=RePEc:chb:bcchwp:291&r=mfd

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