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Financial structure and economic development


  • Ross Levine


An important challenge to economists is to explain how financial contracts and institutions affect economic growth while simultaneously explaining how economic development elicits the creation and modification of an economy's financial structure. This paper addresses one side of this inherently two-sided issue. The paper shows how risk, transactions costs, and economies of scale in information gathering and resource coordination create incentives for the emergence of commonly observed financial institutions and contracts and how the resulting financial structure influences the steady state growth rate of per capita output. Policy can affect growth directly by altering investment incentives and indirectly by changing the incentives underlying the creation of financial structures.

Suggested Citation

  • Ross Levine, 1990. "Financial structure and economic development," International Finance Discussion Papers 381, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:381

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    References listed on IDEAS

    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
    3. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
    4. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    5. Seward, James K, 1990. " Corporate Financial Policy and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 45(2), pages 351-377, June.
    6. Booth, James R. & Smith, Richard II, 1986. "Capital raising, underwriting and the certification hypothesis," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 261-281.
    7. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    8. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 126-150, October.
    9. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
    10. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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