TY  - JOUR
AU  - Greenwood,Jeremy
AU  - Sanchez,Juan M.
AU  - Wang,Cheng
TI  - Financing Development: The Role of Information Costs
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13104
PY  - 2007
Y2  - May 2007
UR  - http://www.nber.org/papers/w13104
L1  - http://www.nber.org/papers/w13104.pdf
N1  - Author contact info:
Jeremy Greenwood
Department of Economics
University of Pennsylvania
3718 Locust Walk
McNeil Building, Rm 160
Philadelphia, PA 19104-6297
Tel: 215/898-1505
Fax: 215/746-2947
E-Mail: eag@jeremygreenwood.net

Juan Sanchez
Department of Economics
University of Rochester
Rochester, NY 14627
E-Mail: sncz@troi.cc.rochester.edu

Cheng Wang
Department of Economics
Iowa State University
Ames, IA  50011
E-Mail: chewang@iastate.edu
AB  - 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.
ER  -