| This dissertation consists of three essays examining the role of financial intermediation in economic development. The first essay examines the cost efficiency of 98 banks in 5 Southeast Asian countries. Adopting stochastic frontier analysis, I employ a translog cost function for estimating cost efficiency while controlling for cross-country differences in financial structure. The findings showed that banks in Korea are most efficient, on average, followed by Malaysian and Thai banks, with banks in Indonesia and the Philippines being least efficient. The correlations between cost efficiency and various bank characteristics vary across countries.;The second essay studies the effect of financial intermediation efficiency on aggregate output and productivity. Total factor productivity has been found to be the major reason for cross-country differences in income in many cases. Likewise, the development experiences of many countries have been characterized by a reallocation of labor and capital from agriculture to industry and services. I develop a model where entrepreneurs who are heterogeneous in terms of talent have access to a low productivity technology and a high productivity technology. External financing is constrained by entrepreneurial net worth. Banks channel household savings into entrepreneurial investment, in the process incurring loan administration costs as well as liquidation costs in case of firm insolvency. Intermediation costs affect output and total factor productivity by influencing the allocation of capital, labor, and entrepreneurial talent between the two technologies. I compute steady-state equilibria and simulate the model to examine whether intermediation costs can account for observed differences in output and productivity among a set of East Asian economies. I find that improvements in financial intermediation efficiency can explain about 68 percent of differences in output per worker levels between Indonesia and Thailand, and mainly through changes in total factor productivity. Improved efficiency in financial intermediation increases the allocation of capital, labor, and entrepreneurial talent into the high productivity sector.;The third essay looks at the impact of foreign entry on bank lending terms. Domestic banks are modeled as employing both collateral-based lending and relationship and soft-information based screening. Foreign banks, though having a cost advantage, do not have access to the screening technology. The effect on interest rates and collateral requirements depend on the quality of the legal environment. Foreign entry may improve lending terms for high-quality borrowers but at the cost of allowing low-quality borrowers access to credit. |
