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Financing Development: The Role of Information Costs

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  • Jeremy Greenwood
  • Juan M. Sanchez
  • Cheng Wang

Abstract

How does technological progress in financial intermediation affect the economy? To address this question a costly-state verification framework is embedded into a standard growth model. In particular, financial intermediaries can invest resources to monitor the returns earned by firms. The inability to monitor perfectly leads to firms earning rents. Undeserving firms are financed, while deserving ones are under funded. A more efficient monitoring technology squeezes the rents earned by firms. With technological advance in the financial sector, the economy moves continuously from a credit-rationing equilibrium to a perfectly efficient competitive equilibrium. A numerical example suggests that finance is important for growth.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13104.

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Date of creation: May 2007
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Publication status: published as Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-91, September.
Handle: RePEc:nbr:nberwo:13104

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  1. Development economics needs to refocus on theory
    by Economic Logician in Economic Logic on 2009-04-10 13:35:00
  2. 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
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