EconPapers    
Economics at your fingertips  
 

Dual Financial Systems and Inequalities in Economic Development

Thierry Tressel ()

Journal of Economic Growth, 2003, vol. 8, issue 2, 223-57

Abstract: This paper analyzes the emergence and the evolution of a modern banking system, in a developing economy where banks coexist with informal credit institutions. Banks have a superior ability in mobilizing savings while informal lenders enjoy a superior information on borrowers. More specifically, banks cannot observe perfectly the behavior of borrowers; therefore the latter need to provide collateral assets in order to obtain bank loans. Physical collateral is not needed to borrow in the informal credit market: informal lenders can rely on social networks to obtain information on borrowers' behavior and invoke social sanctions to enforce repayment. The sustained growth path is associated with the successful development of the banking system that gathers savings on a large scale. However, informal lenders and other traditional credit institutions are necessary in the first stage of development when collateral is scarce. In this economy, the development of modern financial intermediaries is closely associated with the accumulation of collateral assets by entrepreneurs. This implies that the initial level of development as well as the initial distribution of wealth will determine the joint evolution of the real side of the economy and the financial system. Under certain conditions, two long-run steady-state equilibria exist: in the first one the economy stops growing and the banking system never successfully develops; in the second one the economy reaches a sustained growth rate and the informal sector asymptotically vanishes. The impact of the following policies is discussed: financial repression, micro-credit institutions and redistribution of assets. Copyright 2003 by Kluwer Academic Publishers

Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
http://journals.kluweronline.com/issn/1381-4338/contents link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:jecgro:v:8:y:2003:i:2:p:223-57

Ordering information: This journal article can be ordered from
http://www.springer. ... th/journal/10887/PS2

Access Statistics for this article

Journal of Economic Growth is currently edited by Oded Galor

More articles in Journal of Economic Growth from Springer
Bibliographic data for series maintained by Sonal Shukla ().

 
Page updated 2020-06-20
Handle: RePEc:kap:jecgro:v:8:y:2003:i:2:p:223-57