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

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...