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...

How important is financial development for economic development? A costly state verification model of financial intermediation is presented to address this question. The model is calibrated to match facts about the U.S. economy, such as intermediation spreads and the firm-size distribution for...

What determines the technology that a country adopts? While there could be many factors, the efficiency of the country’s financial system may play a significant role. To address this question, a dynamic contract model is embedded into a general equilibrium setting with competitive interme-...