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Financing Development: The Role of Information Costs

  • Jeremy Greenwood

    (University of Pennsylvania)

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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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 171.

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Date of creation: 2007
Date of revision:
Handle: RePEc:red:sed007:171
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

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