Financing Development: The Role of Information Costs

Jeremy Greenwood (), Juan M. 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)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-dev, nep-dge and nep-mac
Date: 2007-05
Note: EFG CF
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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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