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Financing Development: The Role of Information Costs

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Author Info
Jeremy Greenwood (University of Pennsylvania)
Juan M. Sanchez () (Federal Reserve Bank of Richmond)
Cheng Wang () (Iowa State University and Fudan University)

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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. American Economic Review, forthcoming. An extended version of the paper containing some quantitative analysis is available at: http://ssrn.com/abstract=996263

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Publisher Info
Paper provided by Economie d'Avant Garde in its series Economie d'Avant Garde Research Reports with number 14.

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Length: 60 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:eag:rereps:14

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Web page: http://www.jeremygreenwood.net/EAG.htm

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Related research
Keywords: financial intermediation; economic development; costly state verification; firm size;

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Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Thomas Philippon, 2007. "Financiers vs. Engineers: Should the Financial Sector be Taxed or Subsidized?," NBER Working Papers 13560, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Juan M. Sanchez, 2009. "The role of information in the rise in consumer bankruptcies," Working Paper 09-04, Federal Reserve Bank of Richmond. [Downloadable!]
  3. Diego Restuccia & Richard Rogerson, 2007. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Working Papers tecipa-283, University of Toronto, Department of Economics. [Downloadable!]
    Other versions:
  4. Stelios Michalopoulos & Luc Laeven & Ross Levine, 2009. "Financial Innovation and Endogenous Growth," NBER Working Papers 15356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Thomas Philippon, 2007. "Why Has the U.S. Financial Sector Grown so Much? The Role of Corporate Finance," NBER Working Papers 13405, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Diego Restuccia, 2008. "The Latin American Development Problem," Working Papers tecipa-318, University of Toronto, Department of Economics. [Downloadable!]
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