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Abstract:
Evidence is reviewed suggesting that: (a) in market economies financial systems develop and attain maturity during the early stages of industrialization; (b) frictions caused by asymmetric information and the incompleteness of contracts are important in credit markets, and intermediaries play an important role in overcoming them; (c) for a large cross-section of countries financial indicators correlate positively with growth. It is argued that financial intermediaries matter for growth because they moderate the negative effects of incentive frictions, thereby reducing the costs of financing the accumulation of intangible assets like commercial and technical knowledge.
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