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Financial Development, Financing Choice and Economic Growth

  • 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)

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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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
Contact details of provider: Postal: I-80126 Napoli
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