Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/230355
Authors: 
Lee, Hsiao-Hui
Yang, S. Alex
Kim, Kijin
Year of Publication: 
2019
Series/Report no.: 
ADB Economics Working Paper Series No. 599
Abstract: 
Micro, small, and medium-sized enterprises in developing countries face severe financing difficulties, especially when trying to expand internationally. "Information friction" is a significant cause of this financing gap. Recent financial technologies (fintech) can improve supply chain finance efficiency. This paper therefore proposes a conceptual and analytical framework to study how fintech can close the financing gap by reducing information friction. We classify fintech into two categories: information processing technology (Type-A) and information collecting technology (Type-B) and find that both help close the financing gap by lowering the probability of misclassification of good firms as bad. Banks' optimal Type-A investment increases in the bank's size, profit margin, and the fraction of good firms in the market. They invest in Type-B if and only if the investment is sufficiently small. Due to "double marginalization," a bank's optimal fintech investment is lower than a socially optimal level, calling for mechanisms to incentivize or complement banks' investment in fintech.
Subjects: 
artificial intelligence
digitization
fintech
information friction
supply chain finance
JEL: 
O14
O24
O31
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by/3.0/igo/
Document Type: 
Working Paper

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