Citation

Discussion Paper Details

Please find the details for DP1421 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Agency Costs in the Process of Development

Author(s): Daron Acemoglu and Fabrizio Zilibotti

Publication Date: June 1996

Keyword(s): Agency Costs, Development, Financial Institutions, Information and Social Experimentation

Programme Area(s): International Macroeconomics

Abstract: We analyse an economy where production is subject to moral hazard. The degree of the incentive (agency) costs introduced by the presence of moral hazard naturally depends on the information structure in the economy; it is cheaper to induce correct incentives in a society which possesses better ex-post information. The degree of ex-post information depends on the number of projects and entrepreneurs in the economy; the more projects, the better the information. This implies that in the early stages of development, the range of projects and the amount of information are limited and agency costs are high. Since the information created by a project is an externality on others, the decentralized economy is constrained inefficient; in particular, it does not ?experiment? enough. The analysis of the role of information also opens the way to an investigation of the development of financial institutions. We contrast the information aggregation role of stock markets and information production role of banks. Because the amount of available information increases with development, our model predicts the pattern of financial development observed in practice; banks first and stock markets later.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1421

Bibliographic Reference

Acemoglu, D and Zilibotti, F. 1996. 'Agency Costs in the Process of Development'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1421