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RFS Advance Access published online on August 11, 2003
Review of Financial Studies, doi:10.1093/rfs/hhg020
Review of Financial Studies © The Society for Financial Studies 2003; all rights reserved
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© 2003 The Society for Financial Studies

Original Articles

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

Sandeep Baliga 1 and Ben Polak 2*
1 J. L. Kellogg Graduate School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208-2009
2 Economics Department and Yale S.O.M., Yale University, P.O. Box 208268, New Haven, CT 06520-8268

* To whom correspondence should be addressed. E-mail: benjamin.polak{at}yale.edu.


  Abstract

We use a moral hazard model to compare monitored (non-traded) bank loans and traded (non-monitored) 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 taken 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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