Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
This paper presents an analysis of the joint determination of real and financial development. Privately informed designers obtain external finance for their research projects through incentive‐compatible loan contracts. Contracts are enforced through costly monitoring activity which lenders may either undertake themselves, or delegate to a financial intermediary. The analysis establishes a positive, two‐way causal relationship between growth and financial development. In addition, using a multi‐country version of the model, it is shown how both financial and trade liberalization can accelerate the development of intermediation; only trade liberalization has a direct positive effect on growth, however.