Financial Development, Financing Choice and Economic Growth |
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| Authors: | Keith Blackburn Niloy Bose Salvatore Capasso |
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| Institution: | School of Economic Studies, University of Manchester, Manchester, M13 9PL, UK. Tel: 0161 275 3908;Fax: 0161 275 4928;E-mail: .; Department of Economics, University of Wisconsin, Bolton Hall #864, PO Box 413, Milwaukee WI 53201-0413, USA. Tel: 414 229 6132;Fax: 414 229 3860;E-mail: .; Instituto di Studi sulle Societàdel Mediterraneo, via Pietro Castellino 111, 80131 Naples, Italy. Tel: 081 6134 086;Fax: 081 6134 4086;E-mail: . |
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| Abstract: | In an overlapping generations economy, households (lenders) fund risky investment projects of firms (borrowers) by drawing up loan contracts on the basis of asymmetric information. An optimal contract entails either the issue of only debt or the issue of both debt and equity according to whether a household faces a single or double enforcement problem as a result of its own decision about whether or not to undertake costly information acquisition. The equilibrium choice of contract depends on the state of the economy which, in turn, depends on the contracting regime. Based on this analysis, the paper provides a theory of the joint determination of real and financial development, with the ability to explain both the endogenous emergence of stock markets and the complementarity between debt finance and equity finance. |
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