Agency Costs in the Process of Development

CEPR Discussion Paper Series Number 1421

Posted: 8 Mar 1999

See all articles by Daron Acemoglu

Daron Acemoglu

Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Fabrizio Zilibotti

Yale University; Centre for Economic Policy Research (CEPR)

Date Written: June 1996

Abstract

We analyse an economy where production is subject to moral hazard. The degree of the incentive (agency) costs introduced by the presence of moral hazard naturally depends on the information structure in the economy; it is cheaper to induce correct incentives in a society which possesses better ex-post information. The degree of ex-post information depends on the number of projects and entrepreneurs in the economy; the more projects, the better the information. This implies that in the early stages of development, the range of projects and the amount of information are limited and agency costs are high. Since the information created by a project is an externality on others, the decentralized economy is constrained inefficient; in particular, it does not 'experiment' enough. The analysis of the role of information also opens the way to an investigation of the development of financial institutions. We contrast the information aggregation role of stock markets and information production role of banks. Because the amount of available information increases with development, our model predicts the pattern of financial development observed in practice; banks first and stock markets later.

JEL Classification: D82, E44, G20

Suggested Citation

Acemoglu, Daron and Zilibotti, Fabrizio, Agency Costs in the Process of Development (June 1996). CEPR Discussion Paper Series Number 1421, Available at SSRN: https://ssrn.com/abstract=5080

Daron Acemoglu (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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Fabrizio Zilibotti

Yale University ( email )

New Haven, CT 06520
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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