Financing Development: The Role of Information Costs

Jeremy Greenwood (), Juan M. Sanchez and Cheng Wang ()
Additional contact information
Cheng Wang: Iowa State University and Fudan University, http://www.econ.iastate.edu/people/faculty/facWebPage.asp?page=gen&fac=292

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. American Economic Review, forthcoming. 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)
New Economics Papers: this item is included in nep-ban, nep-dev, nep-dge and nep-mac
Date: 2007-03
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Related works:
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)
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Persistent link: http://EconPapers.repec.org/RePEc:eag:rereps:14

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