Financing Development: The Role of Information Costs

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

Staff General Research Papers from Iowa State University, Department of Economics

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.

New Economics Papers: this item is included in nep-ban and nep-dge
Date: 2007-10-18
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Forthcoming in American Economic Review

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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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