FINANCIAL SYSTEMS AND GROWTH - THE EFFECTS OF SHORT-TERMISM

This article compares two types of financial systems in the framework of an innovation-based endogenous growth model. In one case, the financial system is represented by a very large number of small lenders. In another case, one large bank supplies all loans. There are two types of innovation projects, one is a long term project, the other one is short term. There are two types of innovators, the efficient and the inefficient. The financial system based on small lenders leads to the rejection of long term innovation projects, whatever their profitability, in favour of short term projects. On the contrary, a centralised financial system favours long term projects. Under certain conditions, economies with centralised financial systems grow faster than others.