Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 652: Information Accumulation in Development

Daron Acemoglu () and Fabrizio Zilibotti ()
Additional contact information
Daron Acemoglu: Massachusetts Institute of Technology
Fabrizio Zilibotti: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

Abstract: We propose a model in which economic relations and institutions in advanced and less developed countires differ as these societies have access to different amounts of information. The lack of information in less developped economies makes it hard to evaluate the performance of managers, and leads to high "agency costs". Differencies in the amount of information have a variety of sources. As well as factors related to the informational infrastructure, we emphasize that societies accumulate information by repeating certain tasks. Poor societies may therefore have less information partly because the scarcity of capital restricts the repitition of various activities. Two implications of our model are: (i) as an economy develops and generates more information, it achieves better risk-sharing at a given level of effort, but because agents are exirting more effort and the types of activities are changing, the overall level of risk-sharing may decline; (ii) with development, the share of financial intermediation carried out through market institutions should increase.

Keywords: Information; Development; Agency Costs; Incentives; Relative Performance Evaluation; Risk Sharing; Sectorial Transformations

JEL-codes: D82; M13; O13; O14; O40

51 pages, October 1, 1998

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