Financial Development, Financing Choice and Economic Growth

Keith Blackburn (), Niloy Bose and Salvatore Capasso
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Niloy Bose: Centre for Growth and Business Cycle Research, School of Economic Studies, University of Manchester

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: In an overlapping generations economy households (lenders) fund risky investment projects of firms (borrowers) by drawing up loan contracts on the basis of asymmetric information. An optimal contract entails either the issue of only debt or the issue of both debt and equity according to whether a household faces a single or a double enforcement problem as a result of its own decision about whether or not to undertake costly information acquisition. The equilibrium choice of contract depends on the state of the economy which, in turn, depends on the contracting regime. Based on this analysis, the paper provides a theory of the joint determination of real and financial development with the ability to explain both the endogenous emergence of stock markets and the complementarity between debt finance and equity finance.

Keywords: asymmetry of information; economic growth; financial markets; stock markets development (search for similar items in EconPapers)
JEL-codes: O16 O40 G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-dev, nep-fmk, nep-lam, nep-mac and nep-mfd
Date: 2003-04-02
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Published in Review of Development Economics, 2005, vol. 9, pages 135-149

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Related works:
Working Paper: Financial Development, Financing Choice and Economic Growth (2001)
Journal Article: Financial Development, Financing Choice and Economic Growth (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:sef:csefwp:96

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