Product Market Competition and Financial Market Screening

How are the financial market and the product market interrelated? Product market selection affects the default rate and screening incentive of financial intermediaries. In contrast to previous studies, bad screening technology implies a low interest rate and a low default rate: i.e. intermediaries are successfully repaid more often when the country has a bad screening technology. When a country has an underdeveloped financial market, then the product market is also inefficient. This product market inefficiency means that the selection effect of the market is weak. In this case, many entrepreneurs successfully enter the market. Financially underdeveloped countries suffer from low productivity not only for inefficient screening technology but also for weak product market selection. Many firms in financially developed countries tend to choose exports, merely because firms in such countries are more productive. Financially developed countries have a comparative advantage in a financially dependent sector.