Faithin Omaha eBook Collection

Download or read book Essays on Financial Intermediation and Development written by Gabriel De Abreu Madeira and published by . This book was released on 2007 with total page 270 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis applies contract theory to topics of financial intermediation. Chapter 1 studies the effects of imperfect legal enforcement on optimal project financing contracts. It departs from an environment that combines asymmetric information about cash flows and limited commitment by borrowers. Incentive for repayment comes from the possibility of liquidation of projects by a court, but courts are costly and may fail to liquidate. These ingredients make it possible to evaluate how interest rates and amounts of credit respond jointly to variations in the reliability of courts. Examples reveal that costly use of courts may be optimal, but both asymmetric information and uncertainty about courts are necessary conditions for legal punishments ever to be applied. Numerical solutions for several parameterizations show wealthier individuals borrowing with lower interest rates and running higher scale enterprises, which is consistent with stylized facts. High reliability of courts has a consistently positive effect on investment. However its effect on interest rates is subtler and depends essentially on the degree of curvature of the production function.