Security Creation Costs and Economic Development

Abstract

We describe a tractable general equilibrium environment in which producers can transform cash-flows at a cost to create securities that cater to the needs of heterogeneous investors. We use the resulting model to characterize the theoretical implications of reductions in the cost of cash-flow transformation activities. Those reductions result in a greater volume of cash-flow transformation but have ambiguous effects on capital formation, output, and TFP, in clear contrast to the outcome of traditional financial development exercises.

Publication
Economic Theory (forthcoming)