| Chapter 1 summarizes the dissertation and surveys related literature. I suggest that financial intermediaries emerge to overcome technical and incentive frictions in credit markets. I explain how financial intermediaries can affect economic growth by overcoming these frictions. I also summarize the results of Chapters 2 and 3.; Chapter 2 investigates how financial institutions can enhance economic growth by reducing the severity of an adverse selection problem in credit markets. I construct a model in which financial institutions that efficiently collect information offer better loan contracts to highly productive borrowers than would be offered by individual lenders. In an economy with financial intermediaries, a highly productive borrower has a greater chance to be a successful entrepreneur than in an economy without financial intermediaries. Therefore, financial intermediaries help to accumulate more capital, which enhances economic growth. I find that when an economy has a more developed financial system, it has a higher ratio of total loans to GDP, less credit rationing, and a lower ratio of defaulted to total loans, which results in a higher growth rate.; Chapter 3 proposes that the accumulation of information by banks through learning-by-lending is essential in jointly determining the level of financial development and growth. Due to the self-reinforcing mechanism of the accumulation of information, there is a possibility of multiple equilibria. The initial development of a financial sector plays a key role in equilibrium selection. I show that an economy with low initial financial development finds itself in a development trap. Therefore, the present paper offers an explanation for the importance of early development of the financial sector in inducing sustained growth and financial development. I show that the productivity of banks in the production of information is important for subsequent growth and financial development. I propose government policies that can save an economy from a low equilibrium trap. An intergenerational transfer problem can occur due to a missing market. I show that international borrowing may be a solution for this. |
