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Financial Development, Financing Choice and Economic Growth

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Author Info
Keith Blackburn (Centre for Growth and Business Cycle Research, School of Economic Studies, University of Manchester)
Niloy Bose (Centre for Growth and Business Cycle Research, School of Economic Studies, University of Manchester)
Salvatore Capasso () (CNR-ISSM, CSEF, University of Salerno and Centre for Growth and Business Cycle Research, University of Manchester)

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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 enforcement 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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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 96.

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Date of creation: 02 Apr 2003
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Publication status: Published in Review of Development Economics, 2005, vol. 9, pages 135-149
Handle: RePEc:sef:csefwp:96

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Related research
Keywords: asymmetry of information; economic growth; financial markets; stock markets development;

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Find related papers by JEL classification:
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment
O40 - Economic Development, 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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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alex William Trew, 2005. " Finance and Growth: A Critical Survey," CDMA Working Paper Series 0507, Centre for Dynamic Macroeconomic Analysis, revised Apr 2006. [Downloadable!]
    Other versions:
  2. Salvatore Capasso, 2006. "Stock Market Development and Economic Growth: A Matter of Information Dynamics," CSEF Working Papers 166, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
  3. Capasso, Salvatore, 2006. "Stock Market Development and Economic Growth," Working Papers RP2006/102, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  4. Salvatore Capasso, 2004. "Stock market development and economic growth: a matter of informational problems," Money Macro and Finance (MMF) Research Group Conference 2003 10, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  5. K Blackburn & D Varvarigos, 2005. "Growth, Uncertainty and Finance," Centre for Growth and Business Cycle Research Discussion Paper Series 48, Economics, The Univeristy of Manchester. [Downloadable!]
  6. Dimitrios Varvarigos & Keith Blackburn, 2005. "Growth, Uncertainty and Finance," Money Macro and Finance (MMF) Research Group Conference 2005 12, Money Macro and Finance Research Group. [Downloadable!]
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