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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.

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Bibliographic Info

Paper provided by Economics, The Univeristy of Manchester in its series Centre for Growth and Business Cycle Research Discussion Paper Series with number 07.

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Length: 24 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:man:cgbcrp:07

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Citations

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Cited by:
  1. 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.
  2. Dimitrios Varvarigos & Keith Blackburn, 2005. "Growth, Uncertainty and Finance," Money Macro and Finance (MMF) Research Group Conference 2005, Money Macro and Finance Research Group 12, Money Macro and Finance Research Group.
  3. Capasso, Salvatore, 2006. "Stock Market Development and Economic Growth," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) RP2006/102, World Institute for Development Economic Research (UNU-WIDER).
  4. S Capasso, 2003. "Stock Market Development and Economic Growth: A matter of informational problems," Centre for Growth and Business Cycle Research Discussion Paper Series, Economics, The Univeristy of Manchester 32, Economics, The Univeristy of Manchester.
  5. Phouphet KYOPHILAVONG & Gazi Salah Uddin & Muhammad Shahbaz, 2014. "The Nexus Between Financial Development and Economic Growth in Laos," Working Papers 2014-447, Department of Research, Ipag Business School.
  6. Alex Trew, 2006. "Finance and Growth: A Critical Survey," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 82(259), pages 481-490, December.
  7. Capasso, Salvatore & Mavrotas, George, 2010. "Loan processing costs, information asymmetries and the speed of technology adoption," Economic Modelling, Elsevier, Elsevier, vol. 27(1), pages 358-367, January.
  8. 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, Economic Issues, vol. 15(2), pages 69-86, September.
  9. Salvatore Capasso, 2006. "Stock Market Development and Economic Growth: A Matter of Information Dynamics," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 166, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  10. Colombage, Sisira R.N., 2009. "Financial markets and economic performances: Empirical evidence from five industrialized economies," Research in International Business and Finance, Elsevier, Elsevier, vol. 23(3), pages 339-348, September.
  11. Kyophilavong, Phouphet & Salah Uddin, Gazi & Shahbaz, Muhammad, 2014. "The Nexus Between Financial Development and Economic Growth in Lao PDR," MPRA Paper 57308, University Library of Munich, Germany, revised 14 Jul 2014.
  12. Capasso, Salvatore & Mavrotas, George, 2003. "Loan Processing Costs and Information Asymmetries-Implications for Financial Sector Development and Economic Growth," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  13. 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, Elsevier, vol. 37(C), pages 386-394.

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