The Evolution of the Financial Contract in Economic Development
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. Copyright Blackwell Publishing Ltd and The Victoria University of Manchester, 2004.
Year of publication: |
2004
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Authors: | Bose, Niloy ; Pereira, Maria |
Published in: |
Manchester School. - School of Economics, ISSN 1463-6786. - Vol. 72.2004, 2, p. 206-220
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Publisher: |
School of Economics |
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