ECON 313 Lecture Notes - Lecture 6: Adverse Selection, Fixed Capital, Moral Hazard

• School: McGill University
• Department: Economics
• Course: ECON 313
• Professor: Matthieu Chemin

Document Summary

To finance investments in fixed capital machines, factories. To finance investments in working capital (required for ongoing production, seeds, pesticides, fertilisers) Availability of credit is thus key to development. On top of this, credit allocates funds efficiently. Available funds are used where the marginal return is the highest. Moreover, credit is key to the poor. Empirical literature shows strong positive effect of credit on development. Supply of credit s=s(i): increasing function of i. Demand of credit d=d(i): decreasing function of i. Anomoly 1: formal lenders (banks) only lend to the rich. Anomoly 2: credit is rationed (demand is bigger than supply, observed interest is lower than i*) Anomoly 3: demand