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Financing development: the role of information costs

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  • Jeremy Greenwood
  • Juan M. Sánchez
  • Cheng Wang

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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-024.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-024

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Keywords: Economic development ; Intermediation (Finance);

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  1. El spread en el sistema bancario y la delegación de tareas en la actividad productiva
    by Humberto M. Ennis in Foco Económico on 2011-08-31 12:00:00
  2. Development economics needs to refocus on theory
    by Economic Logician in Economic Logic on 2009-04-10 13:35:00
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