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This paper proposes a demand-side theory on the appropriate financial structure for an economy. As argued in the new structural economics, the factor endowment structure in an economy determines its optimal industrial structure. Firms operating in different industries and applying different technologies have different characteristics in firm size and risk. Since various financial institutions have their own strengths and weaknesses in providing financial services, there is an appropriate financial structure for the economy at its particular development level. As the economy develops, the appropriate financial structure for the economy evolves correspondingly. The basic patterns of actual financial structure in the real world are consistent with these predictions.
Lin et al. (Fri,) studied this question.