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The Evolution of the Financial Contract in Economic Development
Author(s) -
Bose Niloy,
Pereira Maria
Publication year - 2004
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/j.1467-9957.2004.00389.x
Subject(s) - credit rationing , economics , loan , capital (architecture) , stock (firearms) , capital accumulation , finance , private information retrieval , rationing , monetary economics , interest rate , microeconomics , profit (economics) , economic growth , mechanical engineering , health care , statistics , mathematics , archaeology , engineering , history
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.