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Financing Development: The Role of Information Costs

Jeremy Greenwood, Juan Sanchez and Cheng Wang

American Economic Review, 2010, vol. 100, issue 4, 1875-91

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. (JEL G21, G31, O16, O33, O41)

JEL-codes: G21 G31 O16 O33 O41 (search for similar items in EconPapers)
Date: 2010
Note: DOI: 10.1257/aer.100.4.1875
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Working Paper: Financing development: the role of information costs (2010) Downloads
Working Paper: Financing development: the role of information costs (2009) Downloads
Working Paper: Financing Development: The Role of Information Costs (2007) Downloads
Working Paper: Financing Development: The Role of Information Costs (2007) Downloads
Working Paper: Financing Development: The Role of Information Costs (2007) Downloads
Working Paper: Financing Development: The Role of Information Costs (2007)
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