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Bank Deposit Contracts Versus Financial Market Participation in Emerging Economies

The financial sector of emerging economies in Africa is characterized by a non-competitive banking sector which dominates any direct participation of agents in asset markets. Based on a variant of Diamond and Dybvig’s (1983) model of financial inter-mediation, we formally explain both stylized facts through market inexperience”of agents in emerging economies. While experienced agents correctly predict future mar- ket clearing equilibrium prices, inexperienced agents are ignorant about future market equilibria. As a consequence, a monopolistic banking sector can exploit these agents because their only outside option is an autarkic investment project.

Working paper 354
1 June 2013
RELATED JOURNAL:

Emerging Markets Finance and Trade
17 June 2015
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