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RFS Advance Access originally published online on August 11, 2003
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Rev Fin 2004; 17:129-163
© 2004 The Society for Financial Studies

The Emergence and Persistence of the Anglo-Saxon and German Financial Systems

Sandeep Baliga
Northwestern University

Ben Polak
Yale University

Address correspondence to Sandeep Baliga, J. L. Kellogg Graduate School of Management, Northwestern University, 2001 Sheridan Rd; Evanston, IL 60208-2009, or e-mail: baliga{at}nwu.edu.

We use a moral hazard model to compare monitored (nontraded) bank loans and traded (nonmonitored) bonds as sources of external funds for industry. We contrast the theoretical conditions that favor each system with the historical conditions prevailing when these financial systems evolved during the British and German industrial revolutions. To study persistence, we consider an entry model where financiers take the industrial structure as given when they lend and firms take the financial system as given when they borrow. We show multiple equilibria can exist, compare equilibria in welfare terms, and discuss their robustness to coordination between lenders and borrowers.


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