Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
10477023 | Journal of International Economics | 2005 | 32 Pages |
Abstract
We consider lending and investment under asymmetric information in a small, developing economy. We allow different forms of financial contracts to arise endogenously. Financial intermediaries mitigate a moral hazard problem in investment choice through costly monitoring. We then examine the impact of opening the capital account on both welfare and the structure of lending contracts. Liberalizing the capital account may improve or worsen the efficiency of financial intermediaries, leading to an improvement or worsening of the aggregate composition of investment projects. We show that efficient financial intermediaries in the closed economy are neither necessary nor sufficient for a capital account liberalization to improve welfare.
Related Topics
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Authors
George Alessandria, Jun Qian,