Banks as Catalysts of the Big Push

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Quintieri B. (a cura di), Finanza, Istituzioni e Sviluppo Regionale, Il Mulino, 1997

A literature has developed to substantiate Rosenstein-Rodans intuition that coordination of a critical mass of investments may induce industrialization through a big push. This literature has essentially ignored the question of what economic institutions may overcome the coordination failures which give rise to an underdevelopment trap. In this paper we propose that banks may act as a catalyst for the big push. Our work is motivated by historic evidence that suggest an association between a big push and the emergence of large banks. We develop a model based on Murphy, Shleifer and Vishny (1989) and show that a large bank with sufficient market power can induce the big push by coordinating the investments of a subset of firms in the economy. This creates a critical mass of demand that induces other firms to invest as well. A bank may coordinate firms directly, but more importantly indirectly, that is through the terms of its loans, offering either a low interest rate or investment guarantees. We also show that a overnment might in principle improve on the private market outcome (by subsidizing a banks coordination activities), but that problems of incentives, credibility and dynamic efficiency makes this difficult.