English, Article, Journal or magazine article edition: Financing development : the role of information costs Jeremy Greenwood; Juan M. Sanchez; Cheng Wang

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Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Financing Development: The Role of Information Costs
Author
  • Jeremy Greenwood
  • Juan M. Sanchez
  • Cheng Wang
Physical Description
  • preprint
Notes
  • How does technological progress in financial intermediation affect the economy? To address this question a costly-state verification framework is embedded into a standard growth model. In particular, financial intermediaries can invest resources to monitor the returns earned by firms. The inability to monitor perfectly leads to firms earning rents. Undeserving firms are financed, while deserving ones are under funded. A more efficient monitoring technology squeezes the rents earned by firms. With technological advance in the financial sector, the economy moves continuously from a credit-rationing equilibrium to a perfectly efficient competitive equilibrium. A numerical example suggests that finance is important for growth.
  • RePEc:nbr:nberwo:13104
  • 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 features. 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 underfunded. Technological advance in intermediation leads to more capital accumulation and a redirection of funds away from unproductive firms toward productive ones. Quantitative analysis suggests that finance is important for growth.
  • Economic development
  • RePEc:fip:fedrwp:08-08
  • 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. American Economic Review, forthcoming. An extended version of the paper containing some quantitative analysis is available at: http:/​/​ssrn.com/​abstract=​996263
  • financial intermediation, economic development, costly state verification, firm size
  • RePEc:eag:rereps:14
Language
  • English
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