Agency costs in the process of development

Daron Acemoglu and Fabrizio Zilibotti

No 607, Seminar Papers from Stockholm University, Institute for International Economic Studies

Abstract: We analyze an economy where production is subject to moral hazard. The degree of the incentive (agency) costs introduced by the presence of moral hazard naturally depends on the information structure in the economy; it is cheaper to induce correct incentives in a society which posesses better ex post information. The degree of ex post information depends on the number of projects and entrepreneurs in the economy; the more projects, the better the information. This implies that at the early stages of development, the range of projects and the amount of information are limited and agency costs are high. Since the information created by a project is an externality on others, the decentralized economy is constrained inefficient; in particular, it does not `experiment' enough.

The analysis of the role of information also opens the way to an investigation of the development of financial institutions. We contrast the information aggregation role of stock markets and information production role of banks. Because the amount of available information increases with development, our model predicts the pattern of financial development observed in practice; banks first and stock markets later.

Keywords: Agency Costs; Development; Information; Financial Institutions; Social Experimentation (search for similar items in EconPapers)
JEL-codes: D82 E44 G20 (search for similar items in EconPapers)
Pages: 40 pages
Date: 1997-10-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://su.diva-portal.org/smash/get/diva2:343111/FULLTEXT01 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Working Paper: Agency Costs in the Process of Development (1996)
Working Paper: Agency Costs in the Process of Development (1996)
Working Paper: Agency Costs in the Process of Development (1996)
Working Paper: Agency costs in the process of development (1996)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:iiessp:0607

Access Statistics for this paper

More papers in Seminar Papers from Stockholm University, Institute for International Economic Studies Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Hanna Christiansson ().