Financing development: the role of information costs

Jeremy Greenwood (), Juan M. Sanchez and Cheng Wang

No 08-08, Working Paper from Federal Reserve Bank of Richmond

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 features. 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 underfunded. Technological advance in intermediation leads to more capital accumulation and a redirection of funds away from unproductive firms toward productive ones. Quantitative analysis suggests that finance is important for growth.

Keywords: Economic; development (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge
Date: 2009
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Related works:
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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