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Title:Loan processing costs and information asymmetries: Implications for financial sector development and economic growth PDF Logo
Authors:Capasso, Salvatore
Mavrotas, George
Issue Date:2003
Series/Report no.:WIDER Discussion Papers // World Institute for Development Economics (UNU-WIDER) 2003/84
Abstract:The paper presents a model in which credit-constrained firms might delay the adoption of new and more productive technologies because of the very high external financing costs they face. Our point of departure is that the efficiency of the banking system can have a profound impact on real resource and investment allocation not only directly, by reducing the amount of resources channelled to the credit market, but also indirectly by affecting entrepreneurs’ investment decisions. Along these lines of reasoning we develop a model of information asymmetries in the credit market in which high costs of processing bank loan applications might obstruct investments in high-tech projects and favour, instead, low-return, self-financed investments in mature sectors. The result is that these kinds of costs have a negative impact on the average capital productivity and on the rate of economic growth. In specific circumstances, the combination of these.
Subjects:credit market
information asymmetries
loan processing costs
financial development
economic growth
JEL:E44
O16
Document Type:Working Paper
Appears in Collections:WIDER Discussion Papers, United Nations University (UNU)

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