This paper offers a model of growth with heterogeneous agents in which, due to asymmetric information, financial markets do not work properly. In such a world, the Modigliani-Miller theorem fails to hold, a financial hierarchy emerges and ‘how to finance’ the engine of growth – in our case represented by uncertain endeavours in R&D - matters. In turn, heterogeneity means that agents lack sufficient information on the behaviour adopted by the others, forcing them to make use of naive rules in forming expectations and in calculating their probability of bankruptcy. The basic properties of the model are explored via simulations. In particular, it is possible to appreciate how a worsening of financial conditions (e.g. an increase of the contractual interest rate on loans or of the probability of bankruptcy) affects negatively the long-run average rate of growth.

Financial Markets imperfections, heterogeneity and growth / Gaffeo, Edoardo. - ELETTRONICO. - (1999), pp. 1-35.

Financial Markets imperfections, heterogeneity and growth

Gaffeo, Edoardo
1999-01-01

Abstract

This paper offers a model of growth with heterogeneous agents in which, due to asymmetric information, financial markets do not work properly. In such a world, the Modigliani-Miller theorem fails to hold, a financial hierarchy emerges and ‘how to finance’ the engine of growth – in our case represented by uncertain endeavours in R&D - matters. In turn, heterogeneity means that agents lack sufficient information on the behaviour adopted by the others, forcing them to make use of naive rules in forming expectations and in calculating their probability of bankruptcy. The basic properties of the model are explored via simulations. In particular, it is possible to appreciate how a worsening of financial conditions (e.g. an increase of the contractual interest rate on loans or of the probability of bankruptcy) affects negatively the long-run average rate of growth.
1999
Trento
Università degli Studi di Trento. Dipartimento di Economia
Financial Markets imperfections, heterogeneity and growth / Gaffeo, Edoardo. - ELETTRONICO. - (1999), pp. 1-35.
Gaffeo, Edoardo
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11572/358312
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