Date of Award

12-2003

Degree Name

Doctor of Philosophy

Department

Economics

First Advisor

Dr. Eskander Alvi

Second Advisor

Dr. Matthew Higgins

Third Advisor

Dr. Inayat U. Mangia

Abstract

This dissertation contains three essays on financial intermediation, capital formation, and economic growth and development. The first essay presents a theoretical model explaining the role of financial intermediation in capital formation and economic growth. It outlines a model of search and matching equilibrium in financial economies where a lender owns capital and an entrepreneur owns entrepreneurial skill and output is produced when search generates a meeting between a lender and an entrepreneur. It is shown that investment in capital and skill is inefficient in autarky due to search frictions and an externality. We examine the autarkic equilibrium under bargaining-without-search and bargaining-with-search and argue that the introduction of competitive financial intermediation removes most inefficiencies.

We also study borrower-lender equilibria under asymmetric information and show that the introduction of a financial intermediary lowers monitoring cost and raises the probability of detecting shirking, thus creating opportunities for higher investment and output. This essay identifies two distinct channels through which financial intermediation stimulate economic growth: (i) the usual capital accumulation channel where higher economic growth is due to higher capitalaccumulation and (ii) efficiency gains where economic growth derives from sources other than capital accumulation.

Two empirical investigations, second and third essays, follow to test two key theoretical predictions of the finance-growth literature. The second essayinvestigates the dynamic, particularly long-run, relationship among financial development, investment, and economic growth. A system of equations based onthe hypothesis that financial development has long-run impact on investment and income growth is estimated. The findings indeed confirm the presence of both effects i.e., capital accumulation and efficiency gains with an indication of relatively stronger efficiency gains for the three emerging economies.

The third essay investigates the impact of financial development on the implied speed of per capita income convergence using a Panel data framework. Humancapital and financial development are used as conditioning variables to examine their relative strengths in improving per capita income convergence. The findings interestingly suggest that financial development is at least as relevant as human capital in expediting per capita income convergence.

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Dissertation-Open Access

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