Seminar Papers, Institute for International Economic Studies, Stockholm University
Agency costs in the process of development
() and Fabrizio Zilibotti
Abstract: We analyze an economy where production is subject to moral
hazard. The degree of the incentive (agency) costs introduced by the
presence of moral hazard naturally depends on the information structure in
the economy; it is cheaper to induce correct incentives in a society which
posesses better ex post information. The degree of ex post information
depends on the number of projects and entrepreneurs in the economy; the
more projects, the better the information. This implies that at the early
stages of development, the range of projects and the amount of information
are limited and agency costs are high. Since the information created by a
project is an externality on others, the decentralized economy is
constrained inefficient; in particular, it does not `experiment' enough.
The analysis of the role of information also opens the way to an
investigation of the development of financial institutions. We contrast the
information aggregation role of stock markets and information production
role of banks. Because the amount of available information increases with
development, our model predicts the pattern of financial development
observed in practice; banks first and stock markets later.
Keywords: Agency Costs; Development; Information; Financial Institutions; Social Experimentation; (follow links to similar papers)
JEL-Codes: D82; E44; G20; (follow links to similar papers)
40 pages, October 31, 1997
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Hanna Christiansson ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom