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The Evolution of the Financial Contract in Economic Development

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  • Niloy Bose
  • Maria Pereira

Abstract

This paper presents an analysis of the joint determination of real and financial development. The analysis is based on a simple endogenous growth model in which a borrower's risk type is private information. Our innovation is to determine jointly the equilibrium loan contract and the economy's growth path. We show that at a low level of development an economy is likely to experience a large incidence of credit rationing. As capital accumulates, credit rationing may fall as a result of the emergence of a new contract regime in which agents mitigate information friction by making use of available information. This change in behaviour results in a higher capital accumulation path and a higher steady‐state capital stock.

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  • Niloy Bose & Maria Pereira, 2004. "The Evolution of the Financial Contract in Economic Development," Manchester School, University of Manchester, vol. 72(2), pages 206-220, March.
    • Handle: RePEc:bla:manchs:v:72:y:2004:i:2:p:206-220
    DOI: 10.1111/j.1467-9957.2004.00389.x
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    Cited by:

    1. Fiaschi, Alessandro, 2008. "A note about credit rationing on research and development," MPRA Paper 12300, University Library of Munich, Germany, revised 10 Dec 2008.

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