Abstract
This paper analyzes the mechanism whereby accumulation of pension funds leads to development of capital markets and the preconditions for this to take place. The mechanism is in essence posited as a process of internalizing the pecuniary external effects arising from risk taking within amarket-based financial system. The preconditions consist of the 'scale condition' with respect to the size of pension funds and an 'institutions condition' to ensure the efficient management of pension funds' assets.Results from empirical analyses confirm the 'externality hypothesis' for the mechanism. Differing patterns in the effects of pension funds on capital markets and R&D activities between the Anglo-Saxon countries and the countries of Continental Europe and Japan attest to the significance of the two preconditions for the spillover effects.
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