Agency Costs in Dynamic Economic Models

Costas Azariadis and Shankha Chakraborty

Economic Journal, 1999, vol. 109, issue 455, 222-41

Abstract: The authors consider an overlapping generations economy where capital is produced from bank loans under stochastic constant returns to scale and subject to idiosyncratic shocks whose realizations are costly to verify. Their formulation differs from earlier work in permitting investment projects to be infinitely divisible and private agency costs to be convex. If there are external economies to financial intermediation, then deviations from steady-state output are negatively correlated with the spread between loan and deposit rates. Moreover, the capital stock correspondence is set-valued, a result consistent with poverty traps, growth cycles, and hump-shaped impulse response functions.

Date: 1999
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