The Competitiveness of Alternative Finance

This chapter reviews theories and empirical evidence on the competitiveness of alternative finance. The implicit benefits in alternative finance transactions motivate efforts and improve project outcomes. The informational and incentive advantages in alternative finance often make them a preferred choice over bank finance under the same market conditions. However, due to firm selections in using alternative finance, empirical studies may fail to document these advantages. Moreover, various underlying economic mechanisms influence the trade-off between efforts and profit-sharing, determining a finance channel's contributive or destructive role. Therefore, social, political, and legal environments that affect the effectiveness of these mechanisms determine preferred finance practices in the economy, thus shaping the composition of a country's finance industry. Future studies shall emphasize these comparative differences across countries and focus on the mechanisms rather than formality of financing. Such approaches can provide better policymaking guidance for the regulation of alternative finance