The Evolution of the Financial Contract in Economic Development

15 Pages Posted: 8 Apr 2004

See all articles by Niloy Bose

Niloy Bose

University of Wisconsin at Milwaukee - Department of Economics; Virginia Polytechnic Institute & State University - Department of Economics

Maria Pereira

Universidade de Coimbra - Faculty of Economics

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.

Suggested Citation

Bose, Niloy and Pereira, Maria, The Evolution of the Financial Contract in Economic Development. Available at SSRN: https://ssrn.com/abstract=513780

Niloy Bose (Contact Author)

University of Wisconsin at Milwaukee - Department of Economics ( email )

Bolton Hall
Milwaukee, WI 53211
United States
414-229-6132 (Phone)

HOME PAGE: http://www.uwm.edu/Dept/Economics/faculty/bose.html

Virginia Polytechnic Institute & State University - Department of Economics ( email )

3021 Pamplin Hall
Blacksburg, VA 24061
United States

Maria Pereira

Universidade de Coimbra - Faculty of Economics

Av. Dias da Silva, 165
Coimbra, 3004-512
Portugal

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