Financing Development: The Role of Information Costs

Economie d'Avant Garde Research Report No. 14

59 Pages Posted: 29 Jun 2007 Last revised: 3 Aug 2009

See all articles by Jeremy Greenwood

Jeremy Greenwood

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

Juan M. Sánchez

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Cheng Wang

University of Iowa

Multiple version iconThere are 2 versions of this paper

Date Written: August 3, 2009

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. Quantitative analysis suggests that finance is important for growth.

Keywords: costly-state verification, economic development, financial intermediation, firm size distribution

JEL Classification: E13, O11, O16

Suggested Citation

Greenwood, Jeremy and Sanchez, Juan M. and Wang, Cheng, Financing Development: The Role of Information Costs (August 3, 2009). Economie d'Avant Garde Research Report No. 14. Available at SSRN: https://ssrn.com/abstract=996263 or http://dx.doi.org/10.2139/ssrn.996263

Jeremy Greenwood

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
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 (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Cheng Wang

University of Iowa ( email )

341 Schaeffer Hall
Iowa City, IA 52242-1097
United States

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