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Financial Dependence and Growth (1998)
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| Venue: | American Economic Review |
| Citations: | 1041 - 28 self |
BibTeX
@ARTICLE{Rajan98financialdependence,
author = {Raghuram G. Rajan and Luigi Zingales},
title = {Financial Dependence and Growth},
journal = {American Economic Review},
year = {1998},
pages = {559--586}
}
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Abstract
This paper examines whether nancial development facilitates economic growth by scrutinizing one rationale for such a relationship; that nancial development reduces the costs of external nance to rms. Speci cally, we ask whether industrial sectors that are relatively more in need of external nance develop disproportionately faster in countries with more developed nancial markets. We nd this to be true in a large sample of countries over the 1980s. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality. (JEL O4, F3, G1) A large literature, dating at least as far back as Joseph A. Schumpeter (1911), emphasizes the positive in uence of the development of a country's nancial sector on the level and the rate of growth of its per capita income. The argument essentially is that the services the nancial sector provides { of reallocating capital to the highest value use without substantial risk of loss through moral hazard, adverse selection, or transactions costs { are an essential catalyst of economic growth. Empirical work seems consistent with this argument. For example, on the
Keyphrases
financial dependence external nance nancial sector adverse selection large literature jel o4 caput income empirical work omitted variable transaction cost industrial sector nancial development facilitates economic growth economic growth developed nancial market nancial development reverse causality substantial risk large sample value use essential catalyst moral hazard
