Financing Development: The Role of Information Costs

Jeremy Greenwood, Juan Sanchez and Cheng Wang

No 14, Economie d'Avant Garde Research Reports from Economie d'Avant Garde

Abstract: To address how technological progress in financial intermediation affects the economy, a costly-state verification framework is embedded into the standard growth model. The framework has two novel ingredients. First, firms differ in the risk/return combinations that they offer. Second, the efficacy of monitoring depends upon the amount of resources invested in the activity. A financial theory of firm size results. Undeserving firms are over financed, deserving ones under funded. Technological advance in intermediation leads to more capital accumulation and a redirection of funds away from unproductive firms toward productive ones. With continued progress, the economy approaches its first-best equilibrium. An extended version of the paper containing some quantitative analysis is available at: http://ssrn.com/abstract=996263

Keywords: financial intermediation; economic development; costly state verification; firm size (search for similar items in EconPapers)
JEL-codes: E13 O11 O16 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2007-03
New Economics Papers: this item is included in nep-ban, nep-dev, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

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http://www.jeremygreenwood.net/papers/findev.pdf full text (application/pdf)
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Related works:
Journal Article: Financing Development: The Role of Information Costs (2010)
Working Paper: Financing development: the role of information costs (2010)
Working Paper: Financing development: the role of information costs (2009)
Working Paper: Financing Development: The Role of Information Costs (2007)
Working Paper: Financing Development: The Role of Information Costs (2007)
Working Paper: Financing Development: The Role of Information Costs (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:eag:rereps:14

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