Security creation costs and economic development


We describe a tractable general equilibrium environment in which producers can transform cash-flows at a cost to create securities that cater to the needs of heterogeneous investors. We use the resulting model to characterize the theoretical implications of reductions in the cost of cash-flow transformation activities. Those reductions result in a greater volume of cash-flow transformation but have ambiguous effects on capital formation, output, and TFP, in clear contrast to the outcome of traditional financial development exercises.

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  1. 1.

    Rajan and Zingales (1998) use industry-level data to provide more evidence that causation runs, at least in part, from financial development to economic development.

  2. 2.

    In Aghion et al. (2005), for instance, agency problems limit innovators’ access to finance which dampens long-term growth. Banerjee and Newman (1993), Galor and Zeira (1993), Aghion (1997), and Piketty (1997) argue that similar agency problems can cause poverty traps. Quantitatively, Amaral and Quintin (2010) argue that this type of frictions alone could account for much of the development gap between the USA and middle-income nations such as Mexico or Argentina. Midrigan and Xu (2014) find that these frictions have a lower impact once agents are given more time to self-finance to mitigate the impact of the borrowing constraints they face, but Moll (2014) argues that the mitigating effects of self-financing depend critically on the nature of the idiosyncratic shocks producers face. For similar exercises, see, e.g., Erosa (2001), Jeong and Townsend (2007), Erosa and Cabrillana (2008), Quintin (2008a, b), Buera et al. (2011), Buera and Shin (2013), Caselli and Gennaioli (2013). Papers that study the finance–development nexus qualitatively include Greenwood and Jovanovic (1990), Bencivenga and Smith (1991), Kahn (2001) and Amaral and Quintin (2006). Hopenhayn (2014) provides a detailed review of the literature on finance and misallocation.

  3. 3.

    See the contrasting views of Midrigan and Xu (2014) on one side and Moll (2014) and Amaral and Quintin (2006), on the other.

  4. 4.

    For a review of the extensive literature on optimal security design see, e.g., Schmedders (2001).

  5. 5.

    One can embed this two-date economy into a two-period overlapping generation model in which households supply labor when young and invest their wealth when old. In the resulting economy, investor wealth depends on wages in the previous period. See Sect. 5 for a more detailed discussion of the resulting environment.

  6. 6.

    One area of finance where physical proximity is particularly valuable is Venture Capital which is organized around geographical hubs.

  7. 7.

    That randomization is necessary for existence in models with discrete choice is well-known. See for instance Amaral and Quintin (2010) or Halket (2014) for a discussion.

  8. 8.

    Otherwise, profits are bounded above unless demand for labor diverges to infinity (profits are linear in the wage bill) along a subsequence. If labor demand diverges, wages must converge to zero in at least one state.

  9. 9.

    See the contrasting views of Midrigan and Xu (2014) on one side and Moll (2014) and Amaral and Quintin (2010), on the other.

  10. 10.

    This two-stage view of financial development has a counterpart in the model of Acemoglu et al. (2006) in which, in a nutshell, economic development consists first of harvesting low-hanging fruits but becomes tougher to sustain once obvious growth opportunities have been implemented.


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Correspondence to Pedro S. Amaral.

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We thank Grace Li, Roozbeh Hosseini, Vincenzo Quadrini, Robert Townsend, André Silva, Gianluca Violante, and seminar participants and attendees at the California Macroeconomics Conference, the Midwest Macro Meetings, the Society for Economic Dynamics meetings, the Society for the Advancement of Economic Theory meetings, the North-American and European and Latin American Econometric Society meetings, the Portuguese Economic Journal Meetings, the University of Georgia, the University of California Riverside, Banco de Portugal, and the Federal Reserve Bank of Atlanta for their generous comments.

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Amaral, P.S., Quintin, E. Security creation costs and economic development. Econ Theory 71, 283–304 (2021).

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  • Endogenous security markets
  • Financial engineering
  • Macroeconomic aggregates

JEL Classification

  • E44
  • O11