A Welfare Comparison of the German and U.S. Financial Systems (Reprint 047)

Franklin Allen and Douglas Gale ()

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: There is a wide variation in the structure of financial systems in different countries. We compare two idealized polar extremes. In one, which we refer to as the "German model," banks and other intermediaries predominate. In the other, which we refer to as the "U.S. model," financial markets play the major role. On the household side, we consider issues such as intergenerational and cross-sectional risk sharing, noise suppression and the provision of services. On the firm side, we consider the allocation of investment, the market for corporate control, the market for internal funds, incentives, monitoring and long term relationships and diversity of opinion.

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