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Agency costs in the process of development

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  • Acemoglu, Daron

    ()
    (Massachusetts Institute of Technology)

  • Zilibotti, Fabrizio

    ()
    (Institute for International Economic Studies, Stockholm University)

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.

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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 607.

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Length: 40 pages
Date of creation: 31 Oct 1997
Date of revision:
Handle: RePEc:hhs:iiessp:0607

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
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Fax: +46-8-161443
Web page: http://www.iies.su.se/
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Keywords: Agency Costs; Development; Information; Financial Institutions; Social Experimentation;

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References

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  1. Poirier, Dale J., 1991. "Editor's introduction," Journal of Econometrics, Elsevier, vol. 49(1-2), pages 1-4.
  2. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 274-98, April.
  3. Greenwood, J. & Jovanovic, B., 1990. "Financial Development, Growth, And The Distribution Of Income," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9002, University of Western Ontario, The Centre for the Study of International Economic Relations.
  4. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  5. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  6. Acemoglu, Daron & Zilibotti, Fabrizio, 1996. "Was Prometheus Unbound by Chance? Risk, Diversification and Growth," CEPR Discussion Papers 1426, C.E.P.R. Discussion Papers.
  7. Kyle, Albert S, 1989. "Informed Speculation with Imperfect Competition," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 317-55, July.
  8. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
  9. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
  10. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  11. Greenwood, J. & Smith, B.D., 1995. "Financial Markets in Development, and the Development of Financial Markets," RCER Working Papers 406, University of Rochester - Center for Economic Research (RCER).
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Cited by:
  1. Nazmi, Nader, 2005. "Deregulation, financial deepening and economic growth: The case of Latin America," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(2-3), pages 447-459, May.
  2. C. Simon Fan & Herschel I. Grossman, 1998. "Incentives and Corruption in Chinese Economic Reform," Working Papers 98-8, Brown University, Department of Economics, revised Sep 1998.
  3. Frederic S. Mishkin, 2000. "International Experiences with Different Monetary Policy Regimes," NBER Working Papers 7044, National Bureau of Economic Research, Inc.
  4. Lindbeck, A., 1998. "Swedish Lessons for Post-Socialist Countries," Papers 645, Stockholm - International Economic Studies.
  5. Acemoglu, D. & Zilibotti, F., 1997. "Setting Standards: Information Accumulation in Development," Working papers 97-6, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers, Stockholm University, Institute for International Economic Studies 649, Stockholm University, Institute for International Economic Studies.
  7. Tressel, Thierry, 2003. " Dual Financial Systems and Inequalities in Economic Development," Journal of Economic Growth, Springer, vol. 8(2), pages 223-57, June.
  8. de Aghion, Beatriz Armendariz, 1999. "Development banking," Journal of Development Economics, Elsevier, vol. 58(1), pages 83-100, February.

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