Domestic Resource Mobilization and Financial Development by G. Mavrotas

By G. Mavrotas

This e-book provides insights into the evolving debate regarding the mobilization of family assets and the the most important position that monetary improvement can and may play during this regard, exploring aspects of the financial development–domestic source mobilization nexus, including country case reports.

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As a consequence, the frictionless Arrow–Debreu setup needs to be modified in order to develop a theory that can explain the connections between financial and real variables. Economists have modified this framework in different ways; for example, by introducing different kinds of market frictions, such as liquidity costs and transaction costs, or by assuming imperfect information between borrowers and lenders. 2 Similar arguments have been put forward to explain the dynamic role of stock markets in the process of real resource allocation.

The optimal financial contract, depending on the nature of information asymmetries and on agents’ endowments, might display very different features. Typically, financial contracts take only two forms: one is equity; the other, debt. The differences between the two are quite sharp. Equity entails a repayment that depends on firm’s profits (or losses) and, in specific terms, it entails a repayment that is directly proportional to a firm’s investment returns. Debt, on the other hand, involves a fixed, predetermined repayment that does not depend on a firm’s profits, up to the point that profit is enough to repay the lender the amount has been promised contractually.

However, while equity markets always increase the growth rate relative to the case of autarky, equity markets increase the growth rate relative to banks only if agents are relatively risk averse. For Allen (1993), the emergence of equities depends primarily on the degree of complexity of the production structure, and on informationgathering costs. One of the advantages of stock markets is that they allow for efficient risk sharing by providing incentives for investors to search for information.

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