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 inexperienceof 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.
Bank Deposit Contracts Versus Financial Market Participation in Emerging Economies
Working paper 354
Emerging Markets Finance and Trade
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