Abstract

http://ssrn.com/abstract=986954
 
 

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Financing Development: The Role of Information Costs


Jeremy Greenwood


University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Juan M. Sanchez


Federal Reserve Bank of St. Louis; Federal Reserve Bank of St. Louis

Cheng Wang


University of Iowa

May 2007

NBER Working Paper No. w13104

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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Date posted: June 27, 2007  

Suggested Citation

Greenwood, Jeremy and Sanchez, Juan M. and Wang, Cheng, Financing Development: The Role of Information Costs (May 2007). NBER Working Paper No. w13104. Available at SSRN: http://ssrn.com/abstract=986954

Contact Information

Jeremy Greenwood (Contact Author)
University of Pennsylvania - Department of Economics ( email )
3718 Locust Walk
Philadelphia, PA 19104
United States
215-898-1505 (Phone)
HOME PAGE: http://jeremygreenwood.net
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Juan M. Sanchez
Federal Reserve Bank of St. Louis ( email )
One Federal Reserve Bank Plaza St. Louis, MO 63102
St Louis, VA Mo 63131
United States
Federal Reserve Bank of St. Louis ( email )
P.O. Box 442
St. Louis, MO 63166-0442
United States
Cheng Wang
University of Iowa ( email )
341 Schaeffer Hall
Iowa City, IA 52242-1097
United States
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