| In this paper, we first investigate the functions of financial system from the point of view of transaction cost theory. And then we discuss the different mechanisms by which market-oriented and bank-oriented financial system perform functions in situations of different transaction costs. In order to explain the 'stytlized facts' during three technology revolutions: leadership role in technology change always played by mareket-oriented system and leapfrogging phenomenon in lagging bank-oriented system, we develop a growth model in which financial system play pivotal role in using, diffusing and improving technology. In conclusion, the market-oriented system is good at dealing with different faith of heterogeneous agents when they are confonted with a new technology. In contrast, the comparing advandges of bank-oriented system are manifested in diffusing and improving technology.
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