American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Financing Development: The Role of Information Costs
American Economic Review
vol. 100,
no. 4, September 2010
(pp. 1875–91)
Abstract
To address how technological progress in financial intermediation affects the economy, a costly-state verification framework is embedded into the standard growth model. The framework has two novel ingredients. First, firms differ in the risk/return combinations that they offer. Second, the efficacy of monitoring depends upon the amount of resources invested in the activity. A financial theory of firm size results. Undeserving firms are over-financed, deserving ones under-funded. Technological advance in intermediation leads to more capital accumulation and a redirection of funds away from unproductive firms toward productive ones. With continued progress, the economy approaches its first-best equilibrium. (JEL G21, G31, O16, O33, O41)Citation
Greenwood, Jeremy, Juan M. Sanchez, and Cheng Wang. 2010. "Financing Development: The Role of Information Costs." American Economic Review, 100 (4): 1875–91. DOI: 10.1257/aer.100.4.1875Additional Materials
JEL Classification
- G21 Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- O33 Technological Change: Choices and Consequences; Diffusion Processes
- O41 One, Two, and Multisector Growth Models