Comparing financial systems - a structural analysis
This paper investigates whether the financial markets are relatively more efficient than banks in the UK than in continental Europe. The UK channels a larger fraction of the financial flow to the firms through financial markets than
continental Europe but this is explained by larger firms in the UK, not relatively more efficient markets. This conclusion is drawn from an industry-level structural estimation using data on the UK, France, Germany and Italy. The structural model is based on a novel theory of capital allocation and investment in which the decisions
of heterogenous firms across financing instruments are aggregated in closed-form
Financial structure, bank finance, market finance, heterogenous firms, structural estimation,
This paper builds a model of investment and financing that incorporates heterogeneous firms into general equilibrium. In order to characterize the financial structure of an economy, the model connects the share of market finance in total external finance and the distribution of firm sizes into a simple structural equation, with parameters related to the cost of market finance (compared to intermediated finance). We estimate the relative cost of market finance across countries with data on external financing and firm sizes from France, Germany, Italy, Spain and the United Kingdom. Using the structural model, we propose an explanation of the empirical correlation across countries between estimated financing costs and the characteristics of the population of firms based on welfare maximization. JEL Classification: E20, E44, C13.
Heterogeneous firms, financing patterns, distribution of firm sizes, structural estimation, welfare analysis.
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