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Financial Development, Financing Choice and Economic Growth

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  • K Blackburn
  • N Bose
  • S 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 a double moral hazard 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.

Suggested Citation

  • K Blackburn & N Bose & S Capasso, 2001. "Financial Development, Financing Choice and Economic Growth," Centre for Growth and Business Cycle Research Discussion Paper Series 07, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:07
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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