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Financing Development: The Role of Information Costs

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Author Info
Jeremy Greenwood (University of Pennsylvania)
Juan M. Sanchez () (University of Rochester)
Cheng Wang () (Iowa State University)

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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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File URL: http://www.jeremygreenwood.net/papers/findev.pdf
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Publisher Info
Paper provided by Economie d'Avant Garde in its series Economie d'Avant Garde Research Reports with number 14.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length: 60 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:eag:rereps:14

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Web page: http://www.jeremygreenwood.net/EAG.htm

For technical questions regarding this item, or to correct its listing, contact: (Jeremy Greenwood).

Related research
Keywords: financial intermediation economic development costly state verification

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Find related papers by JEL classification:
E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

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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:
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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. Thomas Philippon, 2007. "Why Has the U.S. Financial Sector Grown so Much? The Role of Corporate Finance," NBER Working Papers 13405, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Thomas Philippon, 2007. "Financiers vs. Engineers: Should the Financial Sector be Taxed or Subsidized?," NBER Working Papers 13560, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Diego Restuccia & Richard Rogerson, 2008. "Policy Distortions and Aggregate Productivity with Heterogeneous Plants," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 707-720, October. [Downloadable!] (restricted)
    Other versions:
  4. Diego Restuccia, 2008. "The Latin American Development Problem," Working Papers tecipa-318, University of Toronto, Department of Economics. [Downloadable!]
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