ABSTRACT A combined treatment of corporate finance and corporate governance is herein proposed. Debt and equity are treated not mainly as alternative financial instruments, but rather as alternative governance structures. Debt governance works mainly out of rules, while equity governance allows much greater discretion. A project‐financing approach is adopted. I argue that whether a project should be financed by debt or by equity depends principally on the characteristics of the assets. Transaction‐cost reasoning supports the use of debt (rules) to finance redeployable assets, while non‐redeployable assets are financed by equity (discretion). Experiences with leasing and leveraged buyouts are used to illustrate the argument. The article also compares and contrasts the transaction‐cost approach with the agency approach to the study of economic organization.

We develop a model of production and exchange with uncertainty concerning the quality of commodities and study the role of fiat money in ameliorating frictions caused by private information. The model is specified so that, without private information, only high-quality commodities are produced, and there is no welfare gain from using money. With private information, there can be equilibria (and sometimes multiple equilibria) where low-quality commodities are produced, and money can increase welfare. Money works by promoting useful production and exchange. In efficient monetary equilibria, agents adopt strategies that increase the probability of acquiring high-quality output.

I. Introduction, 138. — II. A general equilibrium model of the growing low-income economy, 139. — III. The sources of growth paradox, 141. — IV. An analysis of the sources of growth paradox, 144. — V. Conclusion, 147.

A general equilibrium model of imperfectly competitive financial intermediaries is constructed and used to study the effects of some standard policy experiments. One-time increases in the growth rate and in the level of the stock of money have non-neutral (and sometimes surprising) effects on interest rates, the quantity of intermediated borrowing and lending, the number of intermediary firms, inflation and the price level. Optimal government macroeconomic policy is shown to reflect a tradeoff between public sector frictions and the capital market distortion created by increasing returns to scale and imperfect competition in private intermediation.