The Review of Corporate Finance Studies Vol. 4 No. 1 2015
Economic Development and Relationship-Based Financing
Abstract
Formal finance involves the costly acquisition of information about distant entrepreneurs, while relationship-based finance allows financiers to fund a narrow circle of close entrepreneurs without acquiring costly information. In developing economies with low capital endowments, relationship-based finance is optimal because only high-quality entrepreneurs receive funding. However, formal finance may emerge in equilibrium, and it has the only effect of shifting rents from entrepreneurs to financiers. In more-developed economies with higher capital endowments, formal finance becomes necessary to prevent funding of low-quality entrepreneurs. Nevertheless, relationship-based financing may persist in equilibrium, and low-quality close entrepreneurs are funded even when there are high-quality distant entrepreneurs.
- DOI
- 10.1093/rcfs/cfu010
- Volume
- 4
- Issue
- 1
- Pages
- 69-107
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref