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Financial Development, Financing Choice and Economic Growth

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  • Keith Blackburn
  • Niloy Bose
  • Salvatore Capasso

Abstract

In an overlapping generations economy, households (lenders) fund risky investment projects of firms (borrowers) by drawing up loan contracts on the basis of asymmetric information. An optimal contract entails either the issue of only debt or the issue of both debt and equity according to whether a household faces a single or double enforcement problem as a result of its own decision about whether or not to undertake costly information acquisition. The equilibrium choice of contract depends on the state of the economy which, in turn, depends on the contracting regime. Based on this analysis, the paper provides a theory of the joint determination of real and financial development, with the ability to explain both the endogenous emergence of stock markets and the complementarity between debt finance and equity finance. Copyright Blackwell Publishing Ltd 2005.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 9 (2005)
Issue (Month): 2 (05)
Pages: 135-149

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Handle: RePEc:bla:rdevec:v:9:y:2005:i:2:p:135-149

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References

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Citations

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Cited by:
  1. Colombage, Sisira R.N., 2009. "Financial markets and economic performances: Empirical evidence from five industrialized economies," Research in International Business and Finance, Elsevier, vol. 23(3), pages 339-348, September.
  2. Alex Trew, 2006. "Finance and Growth: A Critical Survey," The Economic Record, The Economic Society of Australia, vol. 82(259), pages 481-490, December.
  3. S Capasso, 2003. "Stock Market Development and Economic Growth: A matter of informational problems," Centre for Growth and Business Cycle Research Discussion Paper Series 32, Economics, The Univeristy of Manchester.
  4. Agustín Filippo, 2010. "Imperfectly Substitutable Financial Instruments in an Economic Development Model," Ensayos Económicos, Central Bank of Argentina, Economic Research Department, vol. 1(57-58), pages 59-93, January -.
  5. Capasso, Salvatore, 2006. "Stock Market Development and Economic Growth," Working Paper Series RP2006/102, World Institute for Development Economic Research (UNU-WIDER).
  6. M Mafizur Rahman & M Salahuddin, 2010. "The determinants of economic growth in Pakistan: Does stock market development play a major role?," Economic Issues Journal Articles, Economic Issues, vol. 15(2), pages 69-86, September.
  7. Capasso, Salvatore & Mavrotas, George, 2003. "Loan Processing Costs and Information Asymmetries-Implications for Financial Sector Development and Economic Growth," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  8. Keith Blackburn & Dimitrios Varvarigos, 2005. "Growth, Uncertainty and Finance," The School of Economics Discussion Paper Series 0525, Economics, The University of Manchester.
  9. Salvatore Capasso, 2006. "Stock Market Development and Economic Growth: A Matter of Information Dynamics," CSEF Working Papers 166, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  10. Wolde-Rufael, Yemane, 2009. "Re-examining the financial development and economic growth nexus in Kenya," Economic Modelling, Elsevier, vol. 26(6), pages 1140-1146, November.
  11. Menyah, Kojo & Nazlioglu, Saban & Wolde-Rufael, Yemane, 2014. "Financial development, trade openness and economic growth in African countries: New insights from a panel causality approach," Economic Modelling, Elsevier, vol. 37(C), pages 386-394.
  12. Dimitrios Varvarigos & Keith Blackburn, 2005. "Growth, Uncertainty and Finance," Money Macro and Finance (MMF) Research Group Conference 2005 12, Money Macro and Finance Research Group.
  13. Garofalo, Giuseppe & Morganti, Patrizio, 2010. "Il finanziamento degli investimenti in R&S. Gli effetti sulla crescita e sulla struttura finanziaria," MPRA Paper 23551, University Library of Munich, Germany.
  14. Capasso, Salvatore & Mavrotas, George, 2010. "Loan processing costs, information asymmetries and the speed of technology adoption," Economic Modelling, Elsevier, vol. 27(1), pages 358-367, January.
  15. K Blackburn & D Varvarigos, 2005. "Growth, Uncertainty and Finance," Centre for Growth and Business Cycle Research Discussion Paper Series 48, Economics, The Univeristy of Manchester.

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