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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Financial Structure and Economic Development
Ross Levine
1990-381  (May 1990)

Abstract:  An important challenge to economists is to explain how financial contracts and institutions affect economic growth while simultaneously explaining how economic development elicits the creation and modification of an economy's financial structure. This paper addresses one side of this inherently two-sided issue. The paper shows how risk, transactions costs, and economies of scale in information gathering and resource coordination create incentives for the emergence of commonly observed financial institutions and contracts and how the resulting financial structure influences the steady state growth rate of per capita output. Policy can affect growth directly by altering investment incentives and indirectly by changing the incentives underlying the creation of financial structures.

Full paper(482 KB PDF)

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