Financial Regimes, Capital Structure, and Growth

Abstract

We develop a growth model with endogenous technological progress in which the previous termfinancialnext term sector plays an explicit role. This allows us to consider the role of different previous termfinancial regimesnext term in the growth process. We contrast a bank-dominated previous termfinancialnext term system with a market-dominated system. In the former a previous termfinancialnext term intermediary (a bank) is able to solve informational problems; at a cost, however. There is learning by doing (LBD) in the banking sector. We investigate circumstances under which each of the two previous termregimesnext term emerges. History matters and the emergence of the low-growth previous termregimenext term is feasible. In a second step, we allow an endogenous capital structure choice of firms and analyze the evolution of the previous termfinancialnext term system and capital structure over time.