Financing Development: The Role of Information Costs

Jeremy Greenwood, Juan Sanchez and Cheng Wang

No 13104, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How does technological progress in financial intermediation affect the economy? To address this question a costly-state verification framework is embedded into a standard growth model. In particular, financial intermediaries can invest resources to monitor the returns earned by firms. The inability to monitor perfectly leads to firms earning rents. Undeserving firms are financed, while deserving ones are under funded. A more efficient monitoring technology squeezes the rents earned by firms. With technological advance in the financial sector, the economy moves continuously from a credit-rationing equilibrium to a perfectly efficient competitive equilibrium. A numerical example suggests that finance is important for growth.

JEL-codes: E44 O11 O16 O43 (search for similar items in EconPapers)
Date: 2007-05
New Economics Papers: this item is included in nep-ban, nep-bec, nep-dev, nep-dge and nep-mac
Note: EFG CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (36)

Published as Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-91, September.

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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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