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Financing development: the role of information costs

Jeremy Greenwood, Juan Sanchez and Cheng Wang

No 2010-024, Working Papers from Federal Reserve Bank of St. Louis

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.

Keywords: Economic development; Intermediation (Finance) (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-dge
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Related works:
Journal Article: 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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