Information Accumulation in Development

We propose a model in which economic relations and institutions in advanced and less developed countries differ as these societies have access to different amounts of information. The lack of information in less developed economies makes it hard to evaluate the performance of managers and leads to high “agency costs.” Differences in the amount of information have a variety of sources. As well as factors related to the informational infrastructure, we emphasize that societies accumulate information by repeating certain tasks. Poor societies may therefore have less information partly because the scarcity of capital restricts the repetition of various activities. Two implications of our model are (1) as an economy develops and generates more information, it achieves better risk sharing at a given level of effort, but because agents are exerting more effort and the types of activities are changing, the overall level of risk sharing may decline; (2) with development, the share of financial intermediation carried out through market institutions should increase.