Candidate: Md. Habibur Rahman

Degree of: Doctor of Philosophy

Department: Economics

Title: Three Essays on Financial Intermediation, Capital Formation, and Economic Growth and Development

Committee:
Dr. Eskander Alvi, Chair
Dr. Matthew Higgins
Dr. Inayat U. Mangla

Date: Monday, September 22, 2003 10:00 a.m. - 12:00 p.m.
Dunbar 2204

Abstract: This dissertation contains three essays on the role of financial intermediation in capital formation and economic growth. The first essay presents a theoretical model explaining the role of financial intermediation in capital formation and economic growth. It outlines a model of search and matching equilibrium in financial economies where a lender owns capital and an entrepreneur owns entrepreneurial skill and output is produced when search generates a meeting between a lender and an entrepreneur. It is shown that investment in capital and skill is inefficient in autarky due to search frictions and an externality. We examine the autarkic equilibrium under bargaining-without-search and bargaining-with-search and argue that the introduction of competitive financial intermediation removes most inefficiencies. We also study borrower-lender equilibria under asymmetric information and show that the introduction of a financial intermediary lowers monitoring cost and raises the probability of detecting shirking, thus creating opportunities for higher investment and output.
Two empirical investigation, second and third essays, follow to test two key theoretical predictions of the finance-growth literature. The second essay investigates the dynamic, particularly long-run, relationship among financial development, investment, and economic growth. A system of equations based on the hypoTheses that financial development has a long-run impact on investment and income growth is estimated. Based on the estimated results, two distinct channels through which financial development promotes income growth are identified. One is the impact of financial development on income growth via investment growth, which is the usual capital accumulation channel. The other is the efficiency effect, the impact of financial development on income growth that doesn't depend on investment. This essay confirms the presence of both effects on income growth with an indication of relatively stronger efficiency gains for the three emerging economies.
The third essay contains an empirical study that investigates the impact of financial development on the implied speed of per capita income convergence using a Panel data frame work, specifically Least Squares with Dummy Variables based on fixed effects. The results indicate that financial development is an important factor in closing per capita income gap among countries. Human capital and financial development are used as conditioning variables to examine their relative strengths in improving per capita income convergence. The findings interestingly suggest that financial development is at least as relevant as human capital in expediting per capita income convergence.

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