Financial Structures and Economic Development

Abstract

This paper examines the relationship between the evolution of financial services and long-run economic growth. Liquidity risk, productivity risk, transactions costs, and information gathering and resource coordination costs create incentives for the emergence of financial contracts and institutions. The level of income per capita, public policies, and legal codes determine the provision of financial services and the types of financial structures that provide these services. The resultant financial structures can alter investment incentives, such that the steady state growth rate of per capita output increases.