Financial Development, Financing Choice and Economic Growth

15 Pages Posted: 29 Apr 2005

See all articles by Keith Blackburn

Keith Blackburn

University of Manchester - School of Social Sciences

Niloy Bose

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

Salvatore Capasso

Italian National Research Council (CNR-ISSM); University of Manchester

Abstract

In an overlapping generations economy, households (lenders) fund risky investment projects of firms (borrowers) by drawing up loan contracts on the basis of asymmetric information. An optimal contract entails either the issue of only debt or the issue of both debt and equity according to whether a household faces a single or double enforcement problem as a result of its own decision about whether or not to undertake costly information acquisition. The equilibrium choice of contract depends on the state of the economy which, in turn, depends on the contracting regime. Based on this analysis, the paper provides a theory of the joint determination of real and financial development, with the ability to explain both the endogenous emergence of stock markets and the complementarity between debt finance and equity finance.

Suggested Citation

Blackburn, Keith and Bose, Niloy and Capasso, Salvatore, Financial Development, Financing Choice and Economic Growth. Available at SSRN: https://ssrn.com/abstract=712947

Keith Blackburn

University of Manchester - School of Social Sciences ( email )

Oxford Road
Manchester, M13 9PL
United Kingdom

Niloy Bose

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

Salvatore Capasso (Contact Author)

Italian National Research Council (CNR-ISSM) ( email )

Via San Martino della battaglia, 44
Roma, 00185
Italy

University of Manchester

Oxford Road
Manchester M13 9PL, M13 9PL
United Kingdom

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